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 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.

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.


Immediate Annuities – Where’s the Planning?

As a retirement income planner, in addition to the Retirement Income Visions™ blog posts and MarketWatch RetireMentors articles that I write, I read a lot of retirement planning and retirement income planning (If you’ve been reading my articles, you know there’s a distinct difference between the two disciplines) articles written by other writers.

While I’m happy to see that immediate annuities are often recommended as a potential retirement income planning strategy, I get concerned when they’re touted as the only income solution, especially in today’s low-interest-rate environment.

I have discovered after questioning writers about their recommendation that knowledge about other types of income annuities is lacking in many cases.

An immediate annuity is a fixed income annuity for which annuitization begins one month after date of purchase with a single premium. For those of you who aren’t familiar with, or need to brush up on your understanding of, annuities, please refer to the following five terms that are defined in the Glossary of Terms: annuity, annuitization, fixed annuity, fixed income annuity, and immediate annuity.

From a planning perspective, assuming there isn’t an existing retirement income plan in place that includes deferred fixed income annuities, it’s my belief that the recommendation of an immediate annuity as the only income solution in many cases demonstrates a lack of planning and understanding about other types of annuity income strategies, including how they can interact to optimize an individual or family’s sustainable income.

By definition, annuitization, or the structured payout, of an immediate annuity begins one month after date of purchase of the annuity contract. Assuming that a recommendation is made today to purchase an immediate annuity with a lifetime payout, the lack of income deferral opportunity, combined with today’s low interest rate environment, is generally going to result in a relatively small monthly payment. While the payment is guaranteed by each individual life insurance carrier, subject to each carrier’s claims paying ability, and is subject to favorable income tax treatment, it nonetheless will generally be modest at best.

Assuming that you have at least five years until retirement, you have the ability to implement retirement income planning strategies that include fixed income annuities with deferred payments as part of your plan. This includes deferred income annuities (“DIA’s”) and fixed index annuities (“FIA’s) with guaranteed lifetime withdrawal benefits (“GLWB’s”), generally offered as income riders. Please refer to these terms in the Glossary of Terms if you’re not familiar with them. In addition, you may want to read the five-part series, FIA’s With Income Riders vs. DIA’s: Which is Right for You?

The deferred payment nature of DIA’s and FIA’s with income riders provides insurance carriers with the opportunity to invest your premium for an extended period of time as defined by each annuity contract. How does this benefit you? For starters, there will be no taxation of your investment between the date of your purchase and the date that you begin your withdrawals, otherwise known as tax deferral. More importantly, the deferral period provides you with the ability to receive a larger monthly income stream than a stand-alone immediate annuity solution. Furthermore, the timing of the commencement and amount of your payments can be customized to meet your financial needs.

An immediate annuity, when presented as the only income strategy, is generally not appropriate as a retirement income planning solution in many cases in my opinion. A holistic retirement income plan that includes deferred fixed income annuities is often a preferable alternative.

Annuities Celebration Fixed Index Annuities Retirement Income Planning

Retirement Income Visions Celebrates 3-Year Anniversary!

Thanks to my clients, subscribers, and other readers, Retirement Income Visions™ is celebrating its three-year anniversary. Retirement Income Visions™ has published a weekly post each Monday morning, the theme of which is Innovative Strategies for Creating and Optimizing Retirement Income™.

As stated in the initial post on August 16, 2009, Retirement Income Visions™ Makes Its Debut, the importance of retirement income planning as a separate and distinct discipline from traditional retirement planning was magnified during the October, 2007 – March, 2009 stock market decline. Just ask anyone who retired just prior to, or during, this period that didn’t have a retirement income plan in place when he/she retired.

With increasing life expectancies, record-low interest rates, traditional pension plans going by the wayside, soaring health and long-term care costs, and the potential for inflation, retirement income planning is no longer an option. It has become a necessity for anyone who wants to ensure that he/she will have sufficient income to meet his/her expenses for the duration of retirement. Recognizing this fact, The American College launched its Retirement Income Certified Professional™ (RICP™) program earlier this year in which I was one of the first enrollees.

Since its inception, Retirement Income Visions™ has used a themed approach, with several weeks of posts focusing on a relevant retirement income planning strategy. This year was no exception. The weekly posts, together with the customized Glossary of Terms, which currently includes definitions of 137 terms to assist in the understanding of technical subject matter, has contributed to a growing body of knowledge in the relatively new retirement income planning profession.

While the first two years of Retirement Income Visions™ presented a variety of retirement income planning strategies, fixed index annuities, or “FIA’s,” have been the sole focus of virtually every weekly post for the past 13 months. Continuing a theme that began on July 11, 2011 during the second year of publication with Shelter a Portion of Your Portfolio From the Next Stock Market Freefall, the inner workings of FIA’s, including their unique benefits as a retirement income planning solution, has been discussed in detail. As a result, Retirement Income Visions™ has become an authoritative source of information on this important and timely topic.

Although FIA’s has been the theme of almost every post for over a year, the posts have been organized by a number of sub-themes. Following the July 11, 2011 post, the introduction to the FIA strategy continued with the next five posts, Looking for Upside Potential With Downside Protection – Take a Look at Indexed Annuities (July 18, 2011), Limit Your Losses to Zero (July 25, 2011), Do You Want to Limit Your Potential Gains? (August 1, 2011), When is the Best Time to Invest in Indexed Annuities? (August 8, 2011), and How Does Your Fixed Index Annuity Grow? (August 22, 2011).

The next twelve posts, beginning with the August 29, 2011 post, Indexing Strategies – The Key to Fixed Index Annuity Growth, through the November 14, 2011 post, How to Get Interest Credited to Your Fixed Index Annuity When the Market Declines, presented a thorough discussion of the various traditional fixed index annuity indexing strategies. This included an introduction to, and comparison of, the following indexing methods: annual point-to-point, monthly point-to-point, monthly average, trigger indexing, inverse performance trigger indexing, as well as the fixed account that’s included as one of the strategy choices by virtually every FIA.

Moving beyond the base product, the subject of the next nine posts was an introduction to the income rider that’s offered by many FIA’s. The income, or guaranteed minimum withdrawal benefit (“GMWB”), rider is the mechanism for providing guaranteed (subject to the claims-paying ability of individual life insurance companies) lifetime income with a flexible start date that is essential to so many retirement income plans. This kicked off with the enlightening December 5, 2011 and December 12, 2011 posts, No Pension? Create Your Own and Add an Income Rider to Your Fixed Index Annuity to Create a Retirement Paycheck. The introduction to income rider series also included two two-part series, Your Fixed Index Annuity Income Rider – What You Don’t Receive (December 19, 2011 and December 26, 2011) and 5 Things You Receive From a Fixed Index Annuity Income Rider (January 9, 2012 and January 16, 2012).

Following two posts introducing fixed index annuity income calculation variables on January 23, 2012 and January 30, 2012 (10 Fixed Index Annuity Income Calculation Variables and Contractual vs. Situation Fixed Index Annuity Income Calculation Variables), a five-part series ensued revolving around a topic often misunderstood by the general public — premium bonuses. The posts in this series included 8 Questions to Ask Yourself When Analyzing Premium Bonuses (February 6, 2012), What’s a Reasonable Premium Bonus Percentage? (February 13, 2012), How Will a Premium Bonus Affect a Fixed Index Annuity’s Value? (February 20, 2012), How Will Withdrawals Affect Your Premium Bonus? (February 27, 2012), and How Will a Premium Bonus Affect Your Fixed Index Annuity Income Distribution? (March 5, 2012).

The next five posts delved into the inner workings behind the variables and interaction of variables behind the calculation of income withdrawal amounts from FIA income riders. This included the following posts: Income Account Value vs. Accumulation Value – What’s the Difference? (March 19, 2012), How is Your Fixed Index Annuity’s Income Account Value Calculated? (April 2, 2012), How Much Income Will You Receive From Your Fixed Index Annuity? (April 9, 2012), and a two-part series, Don’t Be Fooled by Interest Rates – It’s a Package Deal (April 16, 2012 and April 23, 2012).

When Should You Begin Your Lifetime Retirement Payout? was the subject of a two-part series (May 7, 2012 and May 14, 2012) followed by another timing question, When Should You Begin Investing in Income Rider Fixed Index Annuities? (May 21, 2012).

The May 28, 2012 through June 18, 2012 four-part series, Fixed Index Annuity Income Rider Similarities to Social Security, was a well-received and timely topic. This was followed by a second five-part comparison series beginning on June 25, 2012 and continuing through July 23, 2012, FIA’s With Income Riders vs. DIA’s: Which is Right for You?

The last two weeks’ posts have addressed the topic of valuation of a FIA’s income rider stream. This included the July 30, 2012 post, What is the Real Value of Your Fixed Index Annuity, and the August 6, 2012 post, Why Isn’t the Value of Your Income Stream Shown on Your Fixed Index Annuity Statement?.

As I did in my August 9, 2010 and August 15, 2011 “anniversary” posts, I would like to conclude this post by thanking all of my readers for taking the time to read Retirement Income Visions™. Once again, a special thanks to my clients and non-clients, alike, who continue to give me tremendous and much-appreciated feedback and inspiration. Last, but not least, thank you to Nira, my incredible wife, for her enduring support of my blog writing and other professional activities.

Annuities Celebration Income Tax Planning IRA Retirement Income Planning Roth IRA Social Security

Retirement Income Visions™ Celebrates 2-Year Anniversary!

Thanks to all of my subscribers and other readers, Retirement Income Visions™ is celebrating its two-year anniversary. Since its debut on August 16, 2009, Retirement Income Visions™ has published a weekly post each Monday morning, the theme of which is Innovative Strategies for Creating and Optimizing Retirement Income™.

As stated in the initial post two years ago, Retirement Income Visions™ Makes Its Debut, the importance of retirement income planning as a separate and distinct discipline from traditional retirement planning was magnified during the October, 2007 – March, 2009 stock market decline. Although the stock market experienced three positive and encouraging days this past week, the market volatility the last three weeks has only served to emphasize the need for a comprehensive retirement income plan.

Add to the mix the increasing instability of the Social Security and Medicare programs and the rapid decline of traditional pensions as a source of retirement income. Not to mention increasing life expectancies, soaring health care costs, and an economic situation ripe for inflation. Retirement income planning is no longer an option – it has quickly become a downright necessity.

Since inception, Retirement Income Visions™ has used a themed approach, with several weeks of posts focusing on a relevant retirement income planning strategy. This past year was no exception. The weekly posts, together with the customized Glossary of Terms, which currently includes definitions of 99 terms to assist in the understanding of technical subject matter, has contributed to a growing body of knowledge in the relatively new retirement income planning profession.

Going back a year, the six August 16 through September 20, 2010 posts completed a 36-part series on Roth IRA conversions. This was a very timely topic with the January 1, 2010 availability of this strategy to all taxpayers regardless of income level, combined with the ability to defer 50% of the reporting of income from a 2010 Roth IRA conversion to 2011 and the other 50% to 2012.

The September 27, 2010 post, Plan for the Frays in Your Social Security Blanket, began a 25-part educational series about Social Security. The first two parts discussed some of the historical events in connection with changes to the Social Security system affecting benefit amounts and delay in the commencement of receipt of benefits. The October 11, 2010 post, Do Your Homework Before Flipping the Social Security Switch, began a five-part series regarding various considerations in connection with electing to begin receiving Social Security benefits before full retirement age (“FRA”).

The November 15, 2010 post, Wait Until 70 to Collect Social Security? examined the opposite end of the spectrum, i.e., delaying the start date of receipt of Social Security benefits. The follow-up three-part series, Pay-to-Play Social Security, presented the “do-over” strategy, a little-publicized strategy for increasing monthly benefits in exchange for repayment of cumulative retirement benefits received.

The “file and suspend” and “double dipping” strategies for potential maximization of Social Security benefits were addressed in the next two two-part posts from December 13, 2010 through January 3, 2011, Breadwinner Approaching Social Security Retirement Age? – File and Suspend and Working? Remember Your Social Security Spousal Benefit When Your Spouse Retires.

Income taxation and associated planning strategies was the subject of the subsequent respective two- and four-part January 10 through February 14, 2011 series, Say Goodbye to Up to 30% of Your Social Security Benefits and Increase Your After-Tax Social Security Benefits. The February 21, 2011 post, Remember Your Future Widow(er) in Your Social Security Plan made the point that the decision regarding the start date of Social Security Benefits, in addition to fixing the amount of your retirement benefit, may also establish the amount of your spouse’s monthly benefit.

Retirement Income Visions™ Social Security series culminated with the three-part February 28 through March 24, 2011 series, Your Social Security Retirement Asset. These three posts discussed the importance of Social Security as an asset, perhaps one’s most important asset, in addition to its inherent role as a monthly retirement income stream.

With the media’s emphasis in 2010 on the two-year deferral of inclusion of income from a 2010 Roth IRA conversion as the motivating factor for pursuing this planning technique, I felt that there wasn’t enough attention given to the potential long-term economic benefits available through use of this investment strategy. Roth IRA Conversions – Don’t Let the Tax Tail Wag the Dog began a six-part series on this important topic on March 21, 2011 that ran through April 25, 2011. The May 2 and May 9, 2011 Roth IRA Conversion Insights two-part series followed up the Roth IRA conversion economic benefit discussion.

The importance of nonretirement assets in connection with retirement income planning was discussed in the May 9, 2011 Roth IRA Conversions Insights post as well as the May 23 and May 30, 2011 respective posts, Nonretirement Investments – The Key to a Successful Retirement Income Plan and Nonretirement vs. Retirement Plan Investments – What is the Right Mix? This was followed up with two posts on June 6 and 13, 2011 regarding traditional retirement funding strategies, Sizeable Capital Loss Carryover? Rethink Your Retirement Plan Contributions and To IRA or Not to IRA?

The June 20 and June 27, 2011 posts, Do You Have a Retirement Income Portfolio? and Is Your Retirement Income Portfolio Tax-Efficient? addressed the need for every retirement income plan to include a plan for transitioning a portion, or in some cases, all, of one’s traditional investment portfolio into a tax-efficient retirement income portfolio. This was followed by the July 5, 2011 timely Yet Another “Don’t Try to Time the Market” Lesson post.

The July 11, 2011 Shelter a Portion of Your Portfolio From the Next Stock Market Freefall began a new timely and relevant ongoing series about indexed annuities. This post was published just ten days before the July 21st Dow Jones Industrial Average peak of 12,724.41 that was followed by the beginning of a steady stock market decline coinciding with the final days of U.S. debt limit negotiations and Standard & Poor’s unprecedented U.S. credit rating downgrade, culminating with a closing low of 10,719.94 this past Wednesday. As implied in the titles of the July 18 and July 25, 2011 posts, Looking for Upside Potential With Downside Protection – Take a Look at Indexed Annuities and Limit Your Losses to Zero, this relatively new investment strategy has the potential to be a key defensive component of a successful retirement income plan.

As I did a year ago, I would like to conclude this post by thanking all of my readers for taking the time to read Retirement Income Visions™. Once again, a special thanks to my clients and non-clients, alike, who continue to give me tremendous and much-appreciated feedback regarding various blog posts. Last, but not least, thank you to my incredible wife, Nira. In addition to continuing to support my weekly blog-writing activities, she also endured my year-long family tree project that I recently completed. Well, sort of. Is a family tree ever completed?

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Retirement Income Planning – The End Game

If you’re a subscriber to Retirement Income Visions™, you may have noticed that, although there have been nine posts prior to this one, none of them has stayed true to the theme of this blog, i.e., Innovative strategies for creating and optimizing retirement income. This post will be no exception. As the saying goes, there’s a method to my madness. In order to understand and appreciate the strategies and apply them to your situation, it’s important to understand the origin of retirement income planning, including the limitations of the retirement asset planning approach.

As explained in The Retirement Planning Paradigm Shift – Part 2, retirement planning is undergoing a paradigm shift. Instead of relying on retirement asset planning as a solution for both the accumulation and withdrawal phases of retirement, people are beginning to recognize, understand, and appreciate the need for, and value of, employing retirement income planning strategies during the withdrawal phase. No doubt about it, per Retirement Asset Planning – The Foundation, retirement asset planning is the way to go in the accumulation stage to build a solid foundation for a successful retirement plan. However, as discussed in The Retirement Planning Shift – Part 2, as a result of the uncertainty of traditional retirement asset planning as a solution for providing a predictable income stream to match one’s financial needs in retirement, retirement income planning was born.

Is Your Retirement Plan At Risk? introduced six risks common to all retirement plans: inflation, investment, income tax, longevity, health, and Social Security benefits reduction.

Beginning with Retirement Asset Planning – The Foundation, the inadequacy of retirement asset planning during the “spend-down” phase was discussed. This begins with the process itself. Unlike most types of financial planning where you get to see the results of your plan after reaching a specified target date, this is not the case with retirement asset planning since the timeframe is undefined.

Withdrawal Drag – The Silent Killer contrasted the beauty of compound rates of return during the accumulation stage with the erosion of portfolio income and the associated benefit of compounding, otherwise known as “withdrawal drag,” in the withdrawal stage of retirement. There is yet another phenomenon that can wreak havoc on your portfolio if you only rely on a retirement asset planning strategy during your retirement years. The Sequence of Returns – The Roulette Wheel of Retirement exposed this investment phenomenon and provided an example of how “luck of the rate-of-return draw” can prematurely devastate a conservative, well-diversified portfolio.

As if all of these variables and financial phenomenon were not a wake-up call to your planning, we mustn’t forget about the “safe withdrawal rate.” Safe Withdrawal Rate – A Nice Rule of Thumb demonstrated how the widely-accepted 4% “safe” withdrawal rate doesn’t necessarily guarantee that you won’t outlive your investment portfolio. Furthermore, the withdrawal amount that is calculated using this methodology typically won’t match your retirement needs.

All of the foregoing financial risks and phenomenon contribute to the inherent uncertainty associated with the retirement asset planning process during the withdrawal phase of retirement. As pointed out in Retirement Asset Planning – The Foundation, even if you’ve done an excellent job of accumulating what appear to be sufficient assets for retirement, you generally won’t know if this is true for many years

Retirement income planning is truly the end game in financial planning. Assuming that your goal is to generate a predictable income stream to match your financial needs in retirement while minimizing your exposure to withdrawal drag, the sequence of returns, and the various risks common to all retirement plans, it generally makes sense for you to begin employing retirement income planning strategies for a portion of your assets ten years before you plan to retire. The amount of assets and the exact timing of implementation are dependent upon your particular retirement and other financial goals as well as your current and projected financial situation.

Financial Planning Retirement Asset Planning Retirement Income Planning

Is Your Retirement Plan At Risk?

Before I write about the specific risks associated with retirement asset planning and the strategies that retirement income planners use to address, and, in many cases, mitigate, these risks, let’s take a look at risks that are common to all retirement planning. While many of these are uncertain and/or uncontrollable, each of them needs to be addressed in a retirement plan.

The risks that will be discussed are as follows, with the first three common to all types of financial planning, and each one intended to be a brief introduction vs. a comprehensive discussion:

  1. Inflation
  2. Investment
  3. Income tax
  4. Longevity
  5. Health
  6. Social Security benefits reduction


Although it is unpredictable as to amount and fluctuation as it pertains to individual and overall variable expenses, a key risk that must be considered in the design and funding stages of all retirement plans is inflation. Unlike most types of financial planning where it is a factor only in the accumulation phase, inflation is equally, if not more important, during the withdrawal stage of retirement planning. The longer the time period, the more magnified are the differences between projected vs. actual inflation rates insofar as their potential influence on the ultimate success of a particular retirement plan.


Unless you are living solely off of Social Security or some other government benefit program, you are directly or indirectly exposed to investment risk. Even if you are receiving a fixed monthly benefit from a former employer, although it isn’t likely, your benefit could potentially be reduced depending upon the investment performance of your former employer’s retirement plan assets and underlying plan guarantees. Whenever possible, investment risk should be maintained at a level in your portfolio that is projected to sustain your assets over your lifetime while achieving your retirement planning goals, assuming that your goals are realistic.

Income Tax

Even if income tax rates don’t change significantly as has been the case in recent years, income tax can consume a sizeable portion of one’s income without proper planning. With the exception of seven states (Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming) that have no personal income tax and two states (New Hampshire and Tennessee) that tax only interest and dividend income), the rest of us need to be concerned about, and plan for, state, as well as, federal income tax. In addition, if you have a sizeable income, it is likely that income tax legislation will be enacted that will adversely affect your retirement plan on at least one occasion during your retirement years.


Unlike other types of financial planning, the time period of retirement planning is uncertain. Although life expectancies are often used as a guide to project the duration of a retirement plan, no one knows how long someone will live. The risk associated with the possibility of outliving one’s assets is referred to as longevity risk. In addition, life expectancies, themselves, are changing from time to time. The August 19, 2009 edition of National Vital Statistic Reports announced a new high of nearly 78 years for Americans. Planning is further complicated for married individuals since you are planning for multiple lives.


An extremely important risk that is sometimes overlooked or not given enough consideration in the design of retirement plans is health. Under-, or uninsured, long-term care events as well as premature death in the case of a married couple, can deal a devastating blow to an otherwise well-designed retirement plan. It is not unusual for a prolonged long-term care situation, such as Alzheimer’s, if not properly planned for, to consume all of one’s retirement capital and other assets. Inadequate life insurance to cover the needs of a surviving spouse can result in dramatic lifestyle changes upon the first spouse’s death.

Social Security Benefits Reduction

Once considered to be unshakable, the security of the Social Security system, including the potential amount of one’s benefits, is questionable. In addition, it was announced in May that for the first time in more than three decades Social Security recipients will not receive a cost of living adjustment, or COLA, increase in their benefits next year. While beneficiaries have received an automatic increase every year since 1975, including an increase of 5.8% in 2009 and a 14.3% increase in 1980, this will not be the case in 2010.

Each of the foregoing six risks needs to be considered, and appropriate strategies developed, in the design and implementation of every retirement plan to improve the chances of success of the plan.

Retirement Asset Planning Retirement Income Planning

The Retirement Planning Paradigm Shift – Part 2

I hope that you’ve had a chance to read The Retirement Planning Paradigm Shift – Part 1. If not, please take the time to do so. This is a continuation, promoted at the end of Part 1 as “Return of the Blog.” Have no fear. While it’s definitely more technical than Part 1, it’s not scary. Break out the popcorn and read on.

Similar to the scientific breakthroughs that Thomas Kuhn discussed in his 1962 landmark book, The Structure of Scientific Revolutions mentioned in Part 1, retirement planning is undergoing a paradigm shift. This is quite natural given the fact that financial planning as a profession is still in its infancy. Its origins trace back just 40 years when Loren Dunton, the father of financial planning who is credited with coining the term “certified financial planner,” set up the Society for Financial Counseling Ethics with a meeting of 13 individuals at Chicago’s O’Hare Airport in 1969.

In order to understand the retirement planning paradigm shift, let’s start by taking a look at two basic financial statements:  the Statement of Financial Condition, or Net Worth Statement, and Cash Flow Projection.  Both reports are frequently prepared by financial planners at the outset of a planning engagement and are  typically updated throughout the course of a relationship with a client. A Net Worth Statement and Cash Flow Projection are used to plan for, and to monitor progress toward, the pursuit of one’s financial goals, including retirement.

The results of cash flow projections that professional financial planners have been preparing for years have only begun to be experienced and scrutinized by retirees during the last couple of decades. As with all new mthodologies, some prove to be successful and others need to be modified based on experience. Retirement planning is no exception.

Traditional retirement planning as it has been, and continues to be, practiced by most financial planners, focuses on the accumulation and “spending down” of one’s assets. This is, in essence, retirement asset planning.  While this type of planning works well in the accumulation stage, ideally resulting in projections of sufficient retirement capital when conservative assumptions are used, unfortunately, it often proves to be inadequate for meeting one’s needs when the plan plays out in retirement years. The reasons why this occurs are important and will be the subject of a future blog post.

As a result of the uncertainty of traditional retirement asset planning as a solution for providing a predictable income stream to match one’s financial needs in retirement, retirement income planning was born.  Cash flow projections incorporating the latter approach typically result in a better matching of projected income to projected needs, reducing the likelihood of outliving one’s retirement capital.

While this alternative approach is still evolving, it’s logically and emotionally more appealing than traditional retirement asset planning for someone who is within 10 years or so of, and throughout, retirement. When properly employed by professional retirement income planners, retirement income planning should ultimately prove to be a more effective strategy for meeting many indviduals’ retirement needs for the vast majority, if not the entire duration, of retirement.

Retirement income planning should supplement, and should not replace, traditional retirement asset planning at the appropriate stage in one’s life in order to provide a total solution. Understanding this phenomenon requires a paradigm shift that will become apparent in future blog posts and will hopefully be an “Aha!” experience, common to all paradigm shifts, that you can use to create a more rewarding retirement planning experience.

Retirement Income Planning

The Retirement Planning Paradigm Shift – Part 1

It’s a fact of life that, unlike our parents’ generation who could depend on a monthly pension supplemented by Social Security, most individuals retiring today from the private sector don’t receive a pension. Many of us have 401(k) plans that are typically rolled over into an IRA as a lump sum when we retire. However, generally speaking, the various organizations that employed us during our working years won’t be making monthly electronic deposits into our checking accounts when we retire.

Unless your lifestyle allows you to survive solely on Social Security or a comparable monthly benefit if you don’t qualify for Social Security, it’s necessary for you to create your own monthly pension. Similar to private sector pension plans that were popular years ago, your monthly pension needs to last for an uncertain period of time – your lifetime as well as your spouse’s lifetime if you’re married.

Many of you are probably asking yourself, “Why do I need to create a monthly pension when I’ve been accumulating all of these assets for all of these years that I plan on using to fund my retirement?” That’s the million dollar question and is precisely the reason why I created this blog. The answer to this question requires a paradigm shift, or a sudden and radical change in one’s accepted thought pattern or behavior. You know when this occurs when you have an “Aha!” experience whereby you suddenly see things in a totally new and different way.

The term paradigm shift was introduced by Thomas Kuhn in his 1962 landmark book, The Structure of Scientific Revolutions. Kuhn demonstrated how almost every significant scientific breakthrough is initially a break with accepted, and typically, long-standing, ways of thinking. While Kuhn provided many historical scientific examples to explain this phenomenon, Stephen Covey provided us with one of the best and most powerful non-scientific examples of a paradigm shift in his #1 national bestseller, The 7 Habits of Highly Effective People.

Covey was traveling on a New York subway one Sunday morning where people were sitting quietly. Suddenly, a man and his children entered the subway. The man sat next to Covey, closing his eyes. His children began running wild, yelling back and forth, throwing things, and even grabbing people’s papers. While everyone on the subway, including Covey, felt irritated, the children’s father was oblivious to the situation. Finally, Covey asked the father if he could control his children since they were disturbing a lot of people. The father replied, “We just came from the hospital where their mother died about an hour ago. I don’t know what to think, and I guess they don’t know how to handle it either.”

Needless to say, Stephen Covey suddenly saw everything differently. This caused him to think differently, feel differently, and behave differently. His heart was filled with the man’s pain. Everything changed in an instant.

So how exactly does the paradigm shift phenomenon apply to retirement planning? Be sure to mark your calendar for Monday, August 31st at the crack of dawn when “The Retirement Planning Paradigm Shift – Part 2” AKA “Return of the Blog” descends from the blogosphere to a local blog site near you. If you haven’t yet subscribed to Retirement Income VisionsTM, please do so now since you won’t want to miss it! And remember, don’t be afraid to click on “Subscribe” at the top of this page.

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Retirement Income Visions™ Makes Its Debut

Welcome to Retirement Income Visions™! As many of you know, I’ve been writing and publishing Financially InKlein’d™, featured on Financial Design Center’s website, for the last 20 years.

Whereas Financially InKlein’d™ covers a spectrum of timely personal financial planning topics revolving around the theme of Planning, Managing, and Protecting Your Financial Independence™,   Financial Design Center’s trademark, the focus of Retirement Income Visions™ is Innovative Strategies for Creating and Optimizing Retirement Income™.

As always, I’m inspired and motivated by my clients. The birth of Retirement Income Visions™ is no exception. While retirement planning has been the cornerstone of my financial planning practice for years, the importance of retirement income planning as a separate and distinct discipline was magnified during the October, 2007 – March, 2009 stock market decline.

My goal in writing this blog is 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. 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.

I’m excited and I look forward to sharing my knowledge and expertise with you on a regular basis. Subject to change, my plan is to publish a new blog post each Monday morning. I invite and encourage you to share your thoughts with other readers of Retirement Income Visions™ by clicking on “Comments” at the end of each blog. Your feedback is very much appreciated and will be considered in connection with the development of future topics.

If retirement income planning is of interest to you, please click on “Subscribe” in the navigation bar above and I will make sure that you automatically receive each edition of Retirement Income Visions™.  Finally, if you know others who you feel would benefit from Retirement Income Visions™, please click on “Email this” or “AddThis!” following this and each forthcoming blog post.

Finally, since the subject matter of this blog is technical in nature, a Glossary of Terms is available for your reference. New terms will be added as they appear in each blog post. You may access the Glossary by either clicking on Glossary in the navigation bar at the top of this blog or by clicking on unbolded blue links in each blog post.

Thank you for visiting.  Until next time!