Archives for June 15, 2019

When you break it down, saving for retirement is fairly straightforward: Set aside a portion of your earnings each year, invest for a long-term time horizon, be patient, and grow your wealth. While this is obviously an over simplification, saving for retirement – at least from an investment standpoint – is pretty simple.

It’s when you actually reach retirement and start drawing income from your savings that things start getting much more complex and uncertain. As such, retirees generally consider guaranteed income and safety of principal more important than average returns.

And it’s not just a preference of retirees – the research backs them up, too.

When it comes to generating what is often considered to be a “safe” income source in retirement, there are really three major ways:

1. Get safe income from the government through bonds or Social Security
2. Use a bank with a money market account or CD
3. Use an insurance company through life insurance or annuities

Despite a somewhat negative perception, annuities have been shown time and time again by researchers to add significant value to a retiree’s financial security. Additionally, annuities often outperform the other two sources of safe income options in retirement.

Let’s look at a few ways research has shown annuities to be valuable.

1. Reduce Portfolio Failure

Research conducted by John Ameriks, Robert Veres and Mark Warshawsky tested the sustainability of investment portfolios. Amazingly, their research found that when adding an immediate annuity into a retirement income portfolio, “for all time periods and for all portfolios, the addition of the annuity leads to a decline in the portfolio failure rates.”

I do not think the value of this can be understated. Adding an annuity into a retirement income portfolio can help reduce your likelihood of running out of money in retirement. The benefits of the annuity are enhanced with longevity, but this research showed value across the spectrum.

It is important to note that their research found that while annuities reduced the downside, they also helped reduce the potential upside of investment gains on the positive side. In other words, they simultaneously decrease your chances of running out of money and accumulating money.

2. Replace Bonds, SPIAs, and Variable Annuities with Fixed SPIAs

Dr. Wade Pfau, one of the leading professionals in retirement income planning research, published a research study called “A Broader Framework for Determining an Efficient Frontier for Retirement Income,” which looked at the efficient frontier of a portfolio to balance two financial objectives for retirement: satisfying spending goals and preserving financial assets. Interestingly, Dr. Pfau found that the most efficient investment mix consisted of a combination of stocks and fixed single premium immediate annuities, and not a more traditional portfolio of stocks and bonds or stocks.

This general position has been supported by other research like Roger Ibbotson’s whitepaper, “Fixed Indexed Annuities: Consider the Alternative,” which notes that fixed indexed annuities (FIAs) can outperform bonds in today’s low interest rate environment.

3. Increase Legacy

Many people worry that adding annuities to your retirement income portfolio will reduce your legacy. However, research has found that it can actually increase your estate and legacy in some cases.

Additional research from Dr. Pfau shows that by adding an annuity to help support lifetime spending in retirement, you may have a greater chance of meeting lifetime spending needs with a smaller portion of assets, creating potential to allow for a larger legacy amount in the event of a longer life. Additionally, the research found that “true liquidity” is increased when an annuity is added into a retirement income portfolio.

Without an annuity, the other assets are typically invested for future income and gains, so they are not really available for annual spending and liquidity needs. By adding an annuity into the mix, liquidity and spending capabilities can actually be increased. So, you can increase spending, true liquidity, and in some cases, legacy, by adding an income annuity into a retirement income portfolio.

The existing research presents us with a few major takeaways.

1. Annuities are likely more beneficial to a retirement income plan than you first thought.
2. Income annuities can provide cheaper and more efficient ways to generate income than traditional safe investments like CDs and bonds.
3. Income annuities really help with one risk that almost no other investment can handle: longevity and portfolio failure.

If you are worried about living a long life and running out of money, consider a simple income annuity as part of your retirement income plan to help increase the sustainability of your retirement income and portfolio.

While Americans are struggling to save Opens a New Window. , they are also living longer lives, which can put a big strain on retirement Opens a New Window. savings.

On average, about half of Americans are on track to experience a potential shortfall covering essential expenses in retirement, according to Fidelity Investments.

A new report from the World Economic Forum found that, in the U.S., the average 65-year-old has enough saved to cover about 9.7 years of retirement – not including Social Security and other government programs.

But with some planning, workers can’t get on the right track to live comfortably throughout retirement.

One way to boost savings accounts, according to Keith Bernhardt, vice president of retirement income at Fidelity Investments, is to stash away 15 percent of income during any given year.

Here are some other tips to manage risks workers might encounter during retirement, according to Bernhardt.

Be prepared for health care expenses

Health care is the “biggest unknown from an expense perspective,” Bernhardt told FOX Business.

While people may have a sense of what they tend to spend on things like transportation and utilities, what they will eventually spend on health care is uncertain, Bernhardt noted.

There is always the possibility that a serious health condition will occur.

Additionally, people are often uncertain about what will be covered when they switch to Medicare and what long-term care will cost, if needed.

Fidelity Investments estimates that the average couple retiring in 2019 will need $285,000 to cover health care costs in retirement. However, some people may live longer and need even more money.

Plan to live longer

Americans are living longer – in some cases into their 80s and 90s. For a person retiring at 65, that could mean they will need twenty to thirty years’ worth of retirement savings.

And while Bernhardt noted that Social Security should be an important part of an overall retirement plan, it is typically not enough for the average person to live on.

However, one can boost benefits by delaying when you claim Social Security. That is “one of the most powerful things people can do,” Bernhardt said. Each year you delay will increase the payout by 8 percent on an annual basis.

Plan for inflation

When investing for retirement, Fidelity said it is wise to consider some growth-oriented assets that will keep pace with the rising cost of living.

While having too much risk in your portfolio in not recommended, adding things like stocks, mutual funds, Treasury inflation-protected securities, real estate securities and commodities could be beneficial as part of a diversified strategy.

Social Security implements cost of living increases, though some groups have argued they are not sufficient to cover rising expenses.

Protect your savings

“In general, people try to protect their savings,” Bernhardt said.

And that is a good strategy. Tapping savings too quickly could put your later years of retirement in jeopardy.

Fidelity Investments recommends withdrawing no more than 4 percent to 5 percent from your personal savings in the first year of retirement, and then adjusting that amount for inflation over the coming years.

Throwing away the alarm clock. Skipping the commute. Traveling the country – or the world. These are the things many people think about when planning their retirement – or, more aptly, what I like to call the “vacation” part of retirement.

While it’s entirely understandable that these aspects of retirement can be motivating or enjoyable to think about, they’ll actually only take up a small part of your time in retirement, perhaps four weeks. So what will you do for the other 48 weeks?

If you retire in your late 50s or early 60s, you might easily live enough 30 years or more. That’s a long time to be on vacation. And it will take a lot of money to be retired that long.

The reality is that there are many decisions that you should make to plan for the rest of your life. Here’s a list of the top 10 financial decisions you can make to improve your finances during retirement:

1. When and how to retire
2. When to start Social Security
3. How to build your retirement income portfolio with savings and pensions (if applicable)
4. What choices to make regarding medical insurance and Medicare
5. Which living expenses to reduce
6. Whether to deploy home equity
7. How to protect against long-term care expenses
8. How to protect against financial fraud and abuse
9. How to provide for your spouse after you’re gone
10. How to plan your financial legacy

However, you’ll do even better in retirement if you integrate the financial decisions listed above with some key lifestyle steps to improve your health, happiness, and life satisfaction. How will you spend 52 weeks of the year? To live long and live well, you’ll want to give serious thought to how you’ll remain relevant to your family, friends, community, and society.

Top on the list might be the interests, causes, and hobbies you want to pursue. You may want or need to work part time for awhile. For many people. playing with the grandkids might be a key activity.

As a result, here’s a list of the top lifestyle decisions you’ll need to consider:

1. The general location you’ll want to settle in
2. The specific home/community you’ll want to live in
3. What steps you can take to enhance your health, including how to improve your nutrition, get proper exercise, manage your stress, get sufficient sleep, and reduce your unhealthy habits
4. How to build your health care team
5. How to develop your health metrics
6. How to nurture your well-being
7. How to develop your social portfolio
8. What you can do to investigate working or volunteering
9. How to plan your nonfinancial legacy

The fact is, if you retire before thinking about many of these decisions, you may be retiring too soon. The reality is that retirement in the 21^st century will take a lot of planning. The worst thing you can do is to wing it when planningthe rest of your life.

Citizens of the world! The press is misleading you on retirement savings!

A worrying new study from the World Economic Forum predicts that “retirees might run out of money 10 years before they die,” according to Bloomberg News coverage. The World Economic Forum calculates that the average 65-year old American has only enough savings to cover 9.7 years of retirement income out of a nearly 20-year expected retirement. Results for other countries are similar.

As usual, headlines from the credulous news media pile up: “Japanese women face retirement savings gap of almost 20 years,” says the Japan Times. ‘UK citizens will on average outlive savings by 10 years’ declares the Financial Times. “Men in the US Could Outlive Retirement Savings by 8 Years,” declares Barron’s. “Most Canadians will outlive their savings by a decade,” says The Globe and Mail. It looks like the retirement crisis has gone global.

Except, well, not. The World Economic Forum study is mistaken, in about the simplest way possible.

But first, let’s run through the Forum’s math. The Forum assumes that retirees need an income equal to about 70% of their pre-retirement earnings. Fair enough: that’s about what most financial advisors recommend.

And the Forum calculates that a typical American would have savings at age 65 sufficient equal to 5.75 times their final salary. Those savings are enough to cover 9.7 years of spending at that 70% replacement rate. Since life expectancy at retirement age is about two decades – a bit more for women, a bit less for men – this leaves the typical American about 10 years short of what they need. And we’re not alone: the Netherlands, the U.K., Japan, Australia, Canada…we’re all in pretty much the same boat.

So what’s the simple trick that creates this worldwide retirement crisis: ignore Social Security! Yes, ignore it, pretend it didn’t exist. As the Forum report states, “These outcomes exclude any other benefits, such as corporate defined benefit pensions or government benefits such as social security.”

This is insane. Whatever Social Security’s problems, the chances that Social Security benefits will go to zero is, well, about zero. And the same goes for government pension plans in other countries. A retirement savings study that doesn’t account for Social Security is worse than useless.

What happens if we take the shocking step of assuming Social Security won’t be eliminated?

Well, the average retiree gets a Social Security benefit equal to about half his pre-retirement earnings. With that 50% replacement rate in place, he needs to save to get his total retirement income to a 70% replacement rate. That means he’s responsible for 20%.

Here comes the math, so get ready: if the World Economic Forum finds the average American can out of their own savings afford 9.7 years of retirement at a 70% replacement rate, that’s amount equal to 679% of a single year’s earnings. Divide that by the 20% residual replacement rate the retiree has to provide on top of Social Security and you get – wait for it! – 34 years.

So, using the one simple trick of not assuming the complete and total elimination of Social Security benefits, we’ve taken Americans from facing a decade long-retirement savings deficit to having an extra decade of income to spare. And the same goes for retirees in other countries as well.

Once again, Americans and now people around the globe are frightened about their retirement security by analysis that stinks and a news media that isn’t mathematically literate enough to smell it.