Tag Archives: retirement plans

6 Strategies to Reduce Your Need for Money When You Retire

retirement_roadMy Comments: These might seem like a no brainer. The financial media is awash with articles talking about how Americans simply don’t have enough money to retire. In the larger perspective, this, if true, is going to put enormous pressure on the government to subsidize the living cost of those who run out of money.

We’ve already talked about how simply leaving people by the side of the road to die is not an option. Even though there are some politicos who want that to happen; they don’t have what it takes to work together and figure out how to avoid it.

Most of us agree that it’s a personal responsibility to pay our own bills, and not rely on handouts. All of us agree, however, that Social Security benefits are already critical to our well being and that without them, millions of Americans would be on the streets, waiting to die.

The pressure on the system is going to grow, just like the pressure on the VA system has created tensions that need to be addressed. The dilemma is that demographics is not a simple variable. By the time most of the boomers come to an end, there will be a time of relative plenty, until such time as the children of the boomers reach retirement age, and then it will start all over again. In the meantime…

by Andrew Schrage on July 16, 2014

When you’re discussing retirement savings strategies with your clients, it’s important to emphasize that they should save as much as possible for their golden years. Of course, that amount varies greatly from person to person, and regardless of an individual’s ability to save, it’s always wise to be thrifty, even during retirement. Fortunately, there are a variety of strategies available that can help your clients reduce how much money they’ll need once they retire and call it a career.

1. Get the home paid off

Whether your client is 30 or 50, have them implement a game plan to pay off their mortgage prior to retirement. Even if they plan to move during retirement, this is a good strategy. If they buy a new home when theirs is paid off, they can avoid a new mortgage, and if they’re downsizing, there will be equity on the table.

One option to consider is refinancing into a 15-year loan. In many cases, it is possible to do so without significantly raising the payment. If that’s not doable, encourage them to start paying more each month. ( another option is to find a way to make 26 bi-weekly payments a year. This has the amazing effect of turning a 30 year mortgage into a 24 year mortgage)

2. Eliminate car payments

Though I am personally years away from needing a new set of wheels, I’m already saving for one in a dedicated bank account. When the time comes to make the purchase, I’ll pay for my new car in cash, and will therefore avoid paying interest. ( but not in cash; cash means lower purchasing power down the road as inflation is going to happen regardless)

Encourage your clients to do the same so that they can always pay for a new car with cash. Proper budgeting to free up money to set aside each month is crucial.

3. Get healthy now, and stay that way

Emphasize the importance of exercise and a healthier diet to your clients. ( avoid too many carbs, eat more fat, and drink some red wine! ) Reducing drinking and smoking and getting on a regimented fitness plan can result in long-term financial gains. According to Fidelity, a retired couple can expect to incur $220,000 worth of expenses for health care alone, but that number can be significantly lessened by staying in optimal physical shape.

4. Enjoy low-cost activities

Trips to Tuscany and motor home treks across the U.S. are fun and exciting, but your clients have a budget to worry about. Extravagant vacations can be taken only if their finances can afford it, but in general, they should look for other low-cost activities. The local library has a wealth of programs available, including exercise clubs and courses on how to navigate a PC, and they also have plenty of DVDs available for free rental. Even inviting the kids over for a potluck can occupy a day of entertainment. Volunteering is also a worthy endeavor that is fun and satisfying. Check serve.gov for more volunteering opportunities.

5. Travel in a budget-friendly style

For local travel, Amtrak offers discounts for seniors, and American Airlines discounts select fares by as much as 50 percent for retirees. Timing is also essential to curb travel costs. For example, October to April is the busiest time of the year for people to travel to Florida, and your clients should avoid such peak times to cut travel costs. For more affordable international travel, your clients can try Costa Rica from May to November, or Sydney in the autumn or spring.

6. Put off applying for Social Security

As you probably know, your Social Security benefit increases by 8 percent each year you delay after full retirement age. Make sure your clients know this. Delaying retirement and working longer can significantly boost Social Security income. ( call or email me for a free report that will tell you which one of the 97 months from age 62 to 70 that will give you the most money )

What other tips can you suggest to reduce retirement expenses?

Buckle Up! The New Bear Market Has Begun!

1-5-2000-to-6_30-2014My Comments: The writer has a powerful message to send. He was right about this back in 2008 but that doesn’t mean he’s right this time. I have clients and prospective clients asking when the next downturn is going to begin. And yet there are many articles that suggest it’s still a long way off.

This week I received my copy of Investment Advisor. In it five famous advisors share their preferred asset allocation of the month. The most conservative of them has 30% in stocks, 50% in bonds with 20% in cash. The previous month he had 30% in stocks, 40% in bonds and 30% in cash. Clearly, he doesn’t think interest rates are going up soon. The other four had about 65% of their holdings in the stock market.

Another example is an investment manager whose results in 2013 were a plus 17.51%. Rather than moving away from the stocks, he is now fully invested in the stock market to the tune of 120%. (To understand how that works, you need to call or email me.)

PS – I’ve left out the charts since they do not add much to the message other than the one at the top.

Craig Brockle / May. 8, 2014

• This article reveals the convincing evidence that a new bear market has already started.
• Those who failed to sell near all-time highs in 2000 and 2007 have a chance to do it here in 2014.
• Learn the two proven, reliable assets that go up when everything else is going down.

Did you or a loved one lose money in the 2008 Financial Crisis? How about the real estate bubble bursting two years earlier? And if we go back to the turn of the millennium, there was the Dot-com Crash. Remember that one?

This article is intended to help as many people as possible avoid another devastating loss. I will explain where we appear to be in the current economic cycle, what appears to be coming next and how you can protect and grow your money like the top 1% of successful investors.

I’ve done my best to make this article understandable by everyone who reads it, whether you have previous investment knowledge or not. Investment terms, when first introduced have a link to their definition to help aid comprehension. If you see something you don’t understand, a Google search of the word + definition can help.

Before we go any further, observe what the above-mentioned financial events look like on a graph. First, we’ll look at the 2006 real estate bubble. Shown below is the past 20 years of home price data based on 10 US cities.

Up until 2006, the consensus was that real estate only goes up in value and that one’s home was a great investment. By 2009, this belief was proven to be utterly false as foreclosures and short sales became widespread.

There is a great deal of evidence that suggests the real estate market is again poised for a significant drop, but explaining that would be an article of its own. Perhaps after reading this article, you’ll agree that the next financial bear market has indeed begun. If so, you will likely conclude that owning real estate through this period will be hazardous.

Now let’s look at the overall US stock market over the past 20 years as represented by the S&P 500 index in the chart below. This shows the S&P 500 from 1994-2014. (at the top is the S&P from 2000-2014)

If a picture is worth a thousand words, I believe the above chart could be worth 30-60% of your current investment portfolio. That is if you fail to recognize the pattern that’s developed and act accordingly, you could stand to lose that much money.

It’s been over five years since the last bear market bottomed and many investors have forgotten what it was like. The following short clip from CBS 60-Minutes titled “The 401k Fallout” will remind you what average investors were experiencing at the time. Those who cannot learn from history are doomed to repeat it.

Now, let me give at least one reason why you might want to listen to me. After all, there are so many conflicting opinions and obviously not everyone can be right. I’m the first to admit that the market has a mind of its own, which no one, including myself can accurately predict at all times. That said, I went on the record in late 2007 with this YouTube video warning viewers to prepare for the upcoming market crash. That video was released the exact month the S&P 500 index peaked, after which it dropped 57%.

After the real estate bubble collapsed in 2006, it became obvious to my contrarian colleagues and me that it would have a spillover effect into the rest of the financial world. There were other telltale warning signs at that time that I’ll explain below as these signs are giving the same message today.

By October 2007, the S&P 500 index (500 largest US companies) was the focus of attention as it set a new all-time high that month. Meanwhile, the Russell 2000 index (2,000 of the smallest publicly-traded US companies) had already been in a bear market for three months, after peaking in July of that year. This is a sign of stock market exhaustion where only a smaller group of stocks continue to push higher while the overall pack falls off. You could picture this as a huge pack of companies climbing a wall. By the end of it, the overwhelming majority were already in their descent while only the biggest companies inched higher.

Today we’re seeing the exact same thing as the Russell 2000 has again been showing obvious signs of weakness, even though the S&P 500 has been revisiting its all-time highs. The Russell 2000 Index Peaked at 1,213 on March 4, 2014.

Another warning sign that a new bear market has begun is courtesy of the volatility index (VIX). In finance, volatility is a measure of the variation of stock prices over time.

Volatility, investor emotions and stock prices are all very closely related. In periods when volatility is low and investors are feeling complacent or even euphoric, we experience high stock prices. Conversely, when stock prices collapse and fear becomes widespread, we see volatility spike much higher.

Volatility measures can be a very early warning signal. For instance, in the last financial crisis, volatility began to rise seven months before the bear market in the Russell 2000 began and 10 months before the S&P 500 started its decline.

Taking a look at volatility in the current cycle, we see that it reached its lowest point on March 14, 2013. Since then volatility has been in an uptrend, setting a consistent pattern of higher lows. This time around, it has taken the Russell 2000 almost 12 months to peak, hitting its high on March 4th of this year. I suspect the S&P 500 will make at least one last push higher, at least above 1900. This would also help fool more people into believing that there’s nothing to worry about when they should actually be most concerned.

Other warning signals are currently blaring today as they did in 2007. These include stocks being extremely overpriced, selling by the most experienced investors and heavy buying by the least informed, the general public. Let’s look at each of these factors briefly.

Adam Hamilton, a contrarian colleague of mine, recently published an excellent article. In it he points out that as of this year, stocks are more overpriced than they were prior the 2008 financial crisis. In case you’re unfamiliar, the value of a stock is determined by comparing a company’s current stock price to how much profit it earns. This is referred to as a price to earnings ratio. For instance if a stock is currently priced at $10 and has earned a profit of $1 over the past year, the stock would be said to have a price to earnings ratio of 10.

Over the past 125 years, the average price to earnings ratio has been 14 for the largest 500 companies in the United States. Prior to the 2008 financial crisis, these same stocks reached peak price to earnings ratios of 23.1. As of the end of March of this year, the average price to earnings ratio for these same 500 stocks was 25.7. This indicates that even if corporate profits were to remain constant, that stock prices would need to drop 45% just to reach their historical average of 14.

Furthermore, we’ve recently seen a significant increase in insider selling of stocks combined with heaving buying by the general public. Insiders include directors and senior officers of publicly traded companies, as well as anyone that owns more than 10% of a company’s voting shares. Insiders are among the most knowledgeable and successful investors as they have such strong understanding of what’s really going on in their company and industry. When insiders are selling, it’s usually wise to take notice. Insiders are among the top 1% of successful investors and act more on logic rather than emotion.

Lastly, we have the average investor. We could refer to them as the other 99%, based on their sheer numbers. These are the least informed investors and have the worst track record. This group tends to react emotionally rather than rationally at major turning points in the market. This is evidenced by the fact that the heaviest selling of stocks by the general public occurred in the first few weeks of 2009. This was right before the last bear market transitioned into one of the strongest bull markets in history.

Recently there hasn’t just been strong buying by the general public, but they have been borrowing more money to buy stocks than they ever have. As always, knowledgeable insiders, commercial traders and contrarian investors are unloading their positions near the current all-time highs to an unsuspecting public that really should know better by now-especially after what happened in 2000 and 2007. Here we are in 2014, another seven years later and it is again time to prepare for another bear market.

While no one, including me, likes to live through difficult economic times, at least we all have a choice as to how we are affected. There are truckloads of lemons coming our way, so I think we’d best get started making lemonade. And while we’re at it, help as many other people as possible do the same.

In crisis, we find both danger and opportunity. Reportedly, there were more millionaires created during the Great Depression than any other time in American history. And that’s back when a million dollars was worth many times what it is today. A million dollars in the Great Depression would be worth over $35 million today.

So, what is one to do? How can you avoid becoming road kill and instead conquer the crash? Fortunately there are proven, reliable ways to protect and grow your money in a bear market. Below are the two best assets I know for doing so.

The first chart shows the US Treasury fund (TLT) rise as the US stock market fell. The period shown is the 2008 financial crisis. When investors panic, they sell everything they can and put their money in something they consider reliable. This is called a “flight to safety” and US Treasury bonds are considered one of the safest assets during times of trouble.

Based on the information in this article, I hope you too realize that a new bear market has begun. Volatility bottoming last year was the first warning signal. More recently we’ve seen the Russell 2000 run out of steam, corporate insiders selling and the general public buying in droves. On top of this, stocks are more overvalued today than they were at the peak in 2007.

My goal in writing this article is to help you and as many other people as possible avoid another devastating financial loss. My 2007 YouTube warning reached over one hundred thousand viewers. This time I’m hoping that millions of people are able to get this message in time. I appreciate you following me here on Seeking Alpha, leaving your comments and sharing this article with others.

Bear markets are not to be feared. In fact, they can be very profitable for those who are well prepared. Buckle up. This is going to be one heck of a ride!

Source: http://seekingalpha.com/article/2202043-buckle-up-the-new-bear-market-has-begun?ifp=0

3 Retirement Planning Essentials to Understand

retirement-exit-2My Comments: I’ve now reduced retirement years to three types of years. They are “go-go”, “slow-go” and “no-go”. Planning for them before you reach retirement is a matter of attempting to get as many $ in the pot as possbile.

After that, it’s a timing issue that is driven by health, the expected life style, and the nature of your bucket list. Plan to spend more in the “go-go” years than you will in the “slow-go” years and they dry up in the “no-go” years.

by: Rachel F. Elson / Financial Planning / Monday, June 9, 2014

HOLLYWOOD, Fla. — Longevity increases and cultural shifts have changed the way Americans plan for retirement — and advisors need to make sure they’re keeping pace.

That was the message from Lena Rizkallah, a retirement strategist at J.P. Morgan Asset Management, at the Pershing Insite conference here on Thursday.

A generation ago, said Rizkallah, the mantra was “be conservative” — whether in lifestyle or in investment decisions. “Now, though, boomers have a bucket list,” she said. “They want to retire in good condition financially but also have goals for themselves.”

That changes some of the calculus for advisors said Rizkallah, who joined Elaine Floyd, a director of retirement and life planning at Horsesmouth, for an energetic discussion of retirement planning.

Among the recommendations they made:

1. Make sure clients have a retirement plan.

“I call this the heart attack slide,” Rizkallah said, posting a chart that mapped a client’s age and current salary against retirement savings benchmarks. “It helps clients gauge where they are.”

She encouraged advisors to talk frankly about both saving rates, for those still in the workforce, and spending plans. In general, she said, spending tends to peak at age 45, then decline in all categories except health care.

But she added a big caveat: “Note that housing continues to be 40% of spending. … More people are entering retirement with a mortgage.”

2. Know the threats to a secure retirement.

Rizkallah outlined three big risks for retirees.

Outliving life expectancy. Remember, she cautioned, that as we age our life expectancy gets longer. There is now a 47% chance that one spouse in a 65-year-old couple will live to 90,” she said, pointing out that the likelihood had increased even during the last year.

Not being able to keep working. People may think they’re going to bolster their retirement plan by working longer, but not everyone can control the timing, Rizkallah said, citing such issues as poor health, family care needs, and layoffs and other workplace changes. “There is a disparity between people’s expectations and the reality,” she said, encouraging advisors to tell clients: “You want to keep working? Great. But don’t make that part of the plan.”

Facing higher costs of health care. Costs continue to rise, she pointed out, adding that there’s a lot of uncertainty around future costs. “It’s really crucial to have this conversation,” she said. “Say, ‘Because we’re seeing this, let’s talk about saving, let’s talk about diversifying.'”

3. Do the math on Social Security.

It’s critical that advisors understand — and are able to communicate to clients — the real impact of delaying Social Security benefits, Floyd told listeners.

She cited as an example a maximum earner who turns 62 this year, noting that if the client takes Social Security at 62, he or she will have collected $798,387 by age 85. But by deferring until age 70, that same client will have $1,035,653 by 85. If the client lives to 95, Floyd added, the deferral would have a more than $600,000 payoff.

Other Social Security nuances are important as well, said Floyd, who received the lion’s share of questions during the Q&A period at the end of the panel. “We are getting lots of questions about the earnings test … which suggests that people are continuing to work and filing for Social Security” — something she said clients “just shouldn’t do.”

Advisors should understand whether their clients are eligible for spousal benefits, whether and when clients can change their minds and undo a Social Security election, and how to maximize benefits for a surviving spouse. That last part gets particularly tricky given boomers’ penchant for divorce, Floyd added: “Social Security rules can get really complicated when there are multiple divorces.”

The Return of the Inflation Chupacabra

My Comments: A few weeks ago I wasted several hours exchanging replies with someone who asked “who is responsible for inflation?” My initial response was to the effect it is a “what” question and not a “who” question.

But that soon devolved into discussion about irrelevant issues that I decided meant the writer had never taken Economics 101, much less passed it. By the fourth day, it was obvious he had heard on Fox News that the Fed was evil incarnate, and he was looking for confirmation. I couldn’t give it to him.

Inflation, in moderation, is a good thing. That’s mainly because deflation to any degree means we are sliding backward into a pool from which escape is very difficult. Since equilibrium is virtually impossible given the number of people on the planet and inevitable lag times between supply and demand, some inflation is desirable. Just not too much.

posted by Jeffrey Dow Jones May 29,2014 in Cognitive Concord

The first quarter GDP was revised lower. It was the first time the economy contracted since 2011, an annualized rate of -1.0%. The market celebrated by making a new all time high!

I wrote for Pro Subscribers last month that a new high in the market would indicate that the “sideways” market we’ve had in 2014 might be coming to an end. The market did indeed break out to a new all time high and it did it quickly enough inside my expected time horizon to maintain a sense of bullishness about the market.

The funk of the first few months of a year may be wearing off. And GDP this quarter is projected to increase at a 3.5% clip.

There aren’t any major other warning signs flashing right now, either. Yes, what’s happening in small caps and certain pockets of technology might be indicative of broader volatility to come. But as I’ve written about repeatedly, as long as earnings keep growing the market is a fundamental buy.

Wait until companies start lowering earnings guidance before adopting too bearish a stance. In the meantime, let’s shift our focus to a long-forgotten topic around these parts. Inflation!

The Return of the Inflation Chupacabra

The reason why the world spends so much time speculating about Fed Policy and interest rates is that it matters to the market. If you think it doesn’t, let me ask: how would you feel about the stock market if cash paid you 3%?

Because that’s what the Fed says the overnight rate may be by 2016 or 2017.
CONTINUE-READING

How Will The Federal Reserve Raise Interest Rates?

house and pigMy Comments: There is little argument that sooner or later the Fed will start to push interest rates up. And when they do, there is going to be confusion about how fast and how far they push. This in turn will cause some volatility and timing issues on Wall Street.

But all this is part and parcel of being a democracy in a capitalistic world. It’s how you manage the movements that separates the survivors from those who will die. If you have money with me, you’ve heard me talk about this ad nauseum. But that’s what I do, so if you have more questions, you know how to find me.

(Unrelated to any of this is our recognition that 70 years ago today, many brave men landed ( and died ) in France to evict the Nazis. My father landed on Dday plus 3, with the British forces. He was in charge of the recovery of all German field equipment; tanks, guns, etc for analysis by the British Army.)

John M. Mason / May. 30, 2014

Summary
• The Federal Reserve continues to taper its security purchases.
• Within the Fed further discussions are taking place with respect to how interest rates might be raised in the future.
• The Fed has already been experimenting with the use of reverse repurchase agreements as a tool to smooth the transition to a “more normal” functioning of the banking system.

This is a question that Robin Harding briefly examines in the Financial Times. The concern is growing… and will continue to grow in the coming months.

As reported in the article, the Fed “debated these tools at its April meeting and instructed the New York Fed to step up tests on a range of experimental facilities.”

The Federal Reserve is looking at “tools” to raise interest rates because the financial markets are not experiencing enough demand for funds relative to the supply of funds to warrant increases in interest rates.

Although the effective Federal Funds rate, the interest rate the Fed targets for executing monetary policy, has been as high as 20 basis points during the time the central bank has been exercising its efforts of Quantitative Easing, over the past year the effective Federal Funds rate has fluctuated around 10 basis points.

On May 28, 2013 the effective Federal Funds rate was 9 basis points and on May 28, 2014 the effective Federal Funds rate was 9 basis points. In between the rate got as high as 12 basis points and as low as 6 basis points, but it never got outside of this range.

There is essentially no demand pressure on the effective Federal Funds rate to rise. Usually at this time in the business cycle, almost five years and counting, the demand pressure in the market is causing money market interest rates to rise.

Not this time! And, why should interest rates rise? The commercial banking system has almost $2.7 trillion in excess reserves, on which reserves member banks are receiving a risk-free 25 basis points. Certainly better than making risky business loans or risky mortgage loans where the spread the banks earn are not a whole lot better than this 25 basis points. Plus, the banks don’t have to put up with the criticism of regulators about the loans that they are making.

So why should the commercial banks be lending?
The point of the Harding article seems to be that if short-term interest rates are going to rise in this extremely weak business recovery, it is going to have to be the Federal Reserve that causes the interest rates to rise.

Not a lot is going to happen, however, in the current environment as the Federal Reserve continues to “taper” its monthly purchases.

Over the last four-week period ending May 28, 2014, the Federal Reserve added a “net” $35.7 billion to its securities holdings. This is consistent with what it said it was going to be doing.

This increase is “small potatoes” compared with the “net” acquisitions over the past 52-week period, which was almost $950 billion.

One should note that this “net” amount of new securities added to the Fed’s portfolio was a little greater than the whole Fed balance sheet before the financial crises began.

But the Fed, over the past year, has been practicing its “exit” moves in the repo market. Harding reports that the most practical method of raising the effective Federal Funds rate is what it calls the “Overnight Fixed-Rate Reverse Repurchase facility”…or, ON RPP.

Well, as I have reported over the past four months, the Fed has been executing Reverse Repurchase Agreements. One must be careful with this title because the reverse repurchase agreements must be interpreted from the side of the government securities dealer and not from the side of the Federal Reserve.

The Federal Reserve is selling securities to a government securities dealer under an agreement to repurchase the securities at a given future date under a set price. By selling the securities the Federal Reserve “reduces” bank reserve balances.
The objective of these “reverse repos” is to reduce the bank reserves that are in the banking system and this could cause interest rates to rise.

At the close of business on May 28, the Federal Reserve had over $170.0 billion in reverse repurchase agreements on its balance sheet. On May 29, 2013, the Fed did not show any reverse repurchase agreements on its balance sheet. Over the past 13-week period the Fed added slightly more than $40.0 billion in reverse repos to its balance sheet so it is obvious that this exercise has been going on for a fairly lengthy time.

In terms of what is happening in the monetary statistics, the same old story applies that I have been reporting over the past four years. Demand deposits at commercial banks are continuing to rise at a fairly rapid rate — they are up almost 16.0 percent from last year but this increase in demand deposits is not coming from lending activity in the commercial banking system.

The major reason that demand deposits are increasing so rapidly is that individuals and businesses are still transferring funds for low-yielding short-term assets into demand deposits. As I have argued before, this is not a sign of strength in the economy, but an indication of the weakness that still exists. Of course, people and businesses are receiving next-to-nothing in interest rates on their “savings” but it is also true that because of the sorry economic state of so many economic units, these economic units want to keep their funds ready for spending, so they keep moving funds to “transactions” accounts.

Furthermore, the rate of increase in currency holdings continues to be historically high. Year-over-year, the rate of growth in currency in the hands of the public is almost 8.0 percent.

Small deposits at commercial banks and thrifts are down, year-over-year, at a 12.0 percent rate. The growth in retail money funds is basically non-existent for the past year and the growth in money in institutional money funds is down for the year.

So, “tapering” continues and officials at the Federal Reserve wonder how they are going to raise interest rates in the future when the time is right. And there still is the major question of what the Federal Reserve is going to do with the $2.7 trillion excess reserves in the banking system.

The answers to all these questions are crucial to the future of the United States economy. That is why it is important to keep a close watch on what the Federal Reserve is doing… and what its officials are thinking. Again, we are in completely new territory.

Be Flexible On 4% Rule

retirement_roadMy Comments: Increasingly, I find myself working with older clients. After all, I’m an older advisor. From time to time there is a question of how fast you should decumulate your nest egg(s). (I’m not sure if “decumulate” is an approved word, but the intent is to convey the opposite of accumulate.)

The rule of thumb has been to restrict withdrawals to 4% annually to help insure the money will last until you die. Only no one is willing to tell me when they will die. From my perspective as an advisor, I try to find common ground with a client so that in their mind we have reached a reasonable conclusion. It might be 3% or it might be 6%, leaving 4% somewhere in netherland.

May 21, 2014 • Debbie Carlson

Although many advisors have used the 4 Percent Rule for determining clients’ retirement withdrawals, there are times to break it, says J.P. Morgan Asset Management’s chief retirement strategist.

After taking account of longevity, health, investment returns, income and other factors, financial advisors need to talk to their clients about what makes their retired clients happy, said Katherine Roy, executive director of individual retirement at J.P. Morgan Asset Management.

Rather than looking at how much money can be withdrawn from portfolios and then adjusting spending, she said, financial advisors should run simulations to determine how much money clients can spend based on their risk profile and projected investment returns. Retirees should be able to enjoy the early years of their retirement when they are more active but still have enough money for their later years when health-care costs start to rise, she said.

In other words, if an active retiree couple wants to take their family to Europe, they should do that while they are healthy enough to enjoy the time and not worry about making a future trade off. By talking with their clients about their portfolio income and projected returns, financial advisors can guide spending decisions to maximize happiness in retirement and avoid the fear of running out of money at an older age. What she’s concerned about is clients regretting not having enjoyed their golden years, she said.

Roy spoke at the HighTower Apex 2014 conference in Chicago Tuesday and presented J.P. Morgan Funds’ 2014 Guide to Retirement, released earlier this year.

She broke down retirement spending into three categories, “go-go,” “slow-go” and “no-go,” a concept popularized by Michael Stein, CFA, in his book, The Prosperous Retirement, Guide to the New Reality. The concept suggests that in the “go-go” stage, usually the first 10 years of retirement, retirees spend more on travel and other luxuries. In the “slow-go” years, clients stay home more and spending less on luxuries, while in the “no-go” years, they may do even less but spend more on health-care costs.

She said she spoke to Stein, who is now retired, and he told her his own retirement trajectory has fallen into these categories. “But he said if he could go back and write his book, he would add that it doesn’t matter how much money you have, but that you must be happy,” she said.

Thus, she said, taking a dynamic approach to retirement planning is critical for financial advisors and their clients, rather than advisors sticking to the 4 Percent Rule, which basically sets the total withdrawal in the first year of retirement at roughly 4 percent of a client’s portfolio and in every subsequent year that initial amount is adjusted for inflation. In a more dynamic approach, advisors may adjust client’s spending annually so that they spend less when portfolio returns are lower and may spend more when returns are higher.

Roy said one way financial advisors can map out spending in retirement is to make health-care costs their own line item. Health-care costs rise toward the end of a person’s life and have higher inflation than other expenses. By making health care its own category, it will help clients understand what they have available for other living expenses.

What’s critical to making this dynamic approach work, versus sticking to the 4 Percent Rule, is that financial advisors meet at least annually to update the client’s goals, age, portfolio size, market assumptions and other factors.

“It’s important to have discussions with clients, rather than (relying on) just a rule of thumb,” Roy said.

7 Retirement Planning Risks You May Not Have Considered

retirement-exit-2My Comments: We wonder sometimes why the media is so consumed with bad news; it’s hard to find items that make you feel good.

Unfortunately, I herewith add another element of negativity to the days actvity. On the other hand, knowing about these seven may help you avoid them which is a good thing. Does that help?

By Adam Cufr / May 12, 2014

The American College’s RICP® curriculum includes a list of 27 risks that retirees face. 27! I discuss this list regularly with clients to help them understand how important this phase of their planning is, and also to pinpoint a few risks that are incredibly important but often overlooked.

Beyond basics like market risk and interest rate risk, here are a few that you may find valuable:

Longevity risk – Medical advances are leading to longer lifespans. This is probably no surprise to you, but I would like you to consider a new twist on this growing challenge. When retirees live longer lives, not only do they run a greater risk of depleting their assets, they can lose perspective about time itself. This can have a significant impact in the realm of behavioral economics. Specifically, the decisions they make early in retirement may not have immediate consequences. A bad choice in the first year of retirement may not show its effects in year two.

But over many years, the outcomes of their decisions compound, either positively or negatively.
A lifestyle choice can feel good for a few years but cause significant harm as the years pass. Therefore, the risk of living long in retirement needs to be considered in more ways than just asset allocation.

Overspending on a new home in a tennis community hundreds of miles from family feels great until one spouse is confined to a wheelchair without extended family nearby to lend a helping hand.

Frailty risk – Are you a practitioner of the systematic withdrawal income planning strategy? When administered correctly, this requires an annual (or more frequent) adjustment of the client’s spending to reflect the safe withdrawal rate their portfolio can support. What happens when the client ages, slows down, and is unable to respond to phone calls or visit you in your office to make those adjustments? Worse yet, what if they lose their decision-making abilities altogether? Their need for income and care hasn’t diminished, but they’re unable to work closely with you.

This risk of the client’s age-related frailty can have meaningful consequences for your ability to serve their needs if you have chosen a complex income strategy for them. This may warrant a discussion about guaranteed income strategies that will help provide needed income, even when the client isn’t as healthy as they were when they began their income plan.

Forced retirement risk – Your client plans to work until age 66 in order to reach full retirement age with Social Security benefits. Unfortunately, a personal health issue forces them to retire at 61. Are they financially prepared to support the lifestyle to which they’ve grown accustomed? How will you adjust their planning to respond to this change? Are their assets positioned in such a way that they have adequate liquidity to meet their needs or will they be forced to tap into assets at a cost to them?

A big emergency fund may not generate attractive yields, but the peace of mind it provides can help turn an unexpected retirement into a blessing.

Loss of spouse risk – What happens to the family income when a death occurs? Oftentimes, you’ll hear that retirees don’t need life insurance. After all, they have enough assets to retire, so they’re self-insured, right? Not so fast. It is imperative to evaluate survivor benefits in pensions and Social Security.

What may feel like a comfortable retirement can become downright terrifying upon the death of a spouse. Income sources are often halved, yet lifestyle costs for the widow remain very similar to those of a couple.

Widows may need to pay for home maintenance that was once done by their spouse. Travel costs can increase because of trips to visit family located across the country. The last thing a widow needs to be concerned with is where to get income after the death of her spouse. By asking a few simple questions when times are good, we can insure them against a disappointing finish to a race well run.

Legacy risk – Retirement income planning is all about balance. Balancing often competing interests is the name of the game. One example is that of legacy risk. Case-in-point: Your client wants to maximize her retirement income and wishes to leave assets for her children and grandchildren as a legacy. Meanwhile, she would like to avoid all market risk and have abundant flexibility and access to cash for unforeseen emergencies. In this example, building a maximumincome plan using guaranteed annuities will most likely eliminate any meaningful financial legacy or bequest for her family.

While the annuities may maximize her income, they will likely be exhausted upon her death, leaving nothing behind. This may be fine if she has a home and other non-financial assets that will become part of her legacy. The risk here is that her wishes are not well-documented and provided for in her planning.

Health care expense risk – It’s no mystery that health care is on the minds of aspiring retirees. How can we plan for this risk when we cannot accurately quantify the cost? Reduce the variables. As in a mathematical equation, too many unknowns create an unsolvable problem. In retirement planning, too many variables can prevent us and our clients from adequately addressing any particular concern. The result is a swirling storm of questions and partial answers.

Rather than questioning whether your client can afford to pay more for health care during retirement, have them track their spending for a month or two. Learn how much money is going out each month to maintain their chosen lifestyle. Compare that to known income sources like Social Security, pensions, income available from their investment portfolio, etc. Once you know their true lifestyle costs and income, you can discover how much is truly excess or discretionary.

This may provide more wiggle room to account for rising health care costs. By isolating this variable, you can perform true risk assessment for them and move toward greater clarity.

Long-term care risk – For people age 65 or older, there is a 40 percent chance they will step foot into a nursing home during their lifetime. This risk is not new to most advisors. What’s interesting is how much this risk affects their retirement income later in retirement. Some refer to this retirement spending curve as the “retirement smile.”

The most damaging inflationary force for the retiree is long-term care expense. We have so many tools at our disposal compared to 10 years ago, that it’s a shame to not be well-versed in this planning area. As longevity continues to increase, more and more of our retired clients will qualify to receive income from a long-term care qualifying financial product. Why not address long-term care risk for your client with leveraged and tax-advantaged dollars in the form of traditional or hybrid long-term care products.