Safe Retirement Income

Your Retirement Depends on It

Tim Barton, Chartered Financial Consultant

Pepin Wisconsin
715-220-4866

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The 3 Sources of Retirement Income

  What Are the Available Sources of Retirement Income?

When you retire and your earning power ceases, you will have to depend on three primary sources for your retirement income:

 

Social Security

  • According to the Social Security Administration, the average retired worker in 2015 receives an estimated $1,328 monthly benefit, about 40% of average preretirement income. As pre-retirement income increases, however, the percentage replaced by Social Security declines.

Employer Sponsored Plans and IRAs

  • You may be eligible to participate in a retirement plan established by your employer and receive pension income at your retirement. You may also be able to contribute to an individual retirement account (IRA) to supplement Social Security and pension benefits.

Home Ownership and Personal Retirement

  • For many people, there is a gap between the retirement income they can expect from Social Security and employer-sponsored plans/IRAs and their retirement income objectives. Home equity can be used to bolster retirement security.
  • Personal retirement savings, including bank and brokerage accounts and insurance and annuity contracts, can be used to bridge a retirement income gap.

If sufficient retirement income is not available, will you defer your retirement age, or will you choose to reduce your standard of living?

 

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What is Trust?

What is Trust?

The word “trust” is applied to all types of relationships, both personal and business, to indicate that one person has confidence in another person.

For our purposes, a trust is a legal device for the management of property. Through a trust, one person (the “grantor” or “trustor”) transfers the legal title of property to another person (the “trustee“), who then manages the property in a specified manner for the benefit of a third person (the “trust beneficiary“). A separation of the legal and beneficial interests in the property is a common denominator of all trusts.

In other words, the legal rights of property ownership and control rest with the trustee, who then has the responsibility of managing the property as directed by the grantor in the trust document for the ultimate benefit of the trust beneficiary.

A trust can be a living trust, which takes effect during the lifetime of the grantor, or it can be a testamentary trust, which is created by the will and does not become operative until death.

Also, a trust can be a revocable trust, meaning that the grantor retains the right to terminate the trust during lifetime and recover the trust assets, or it can be an irrevocable trust; one that the grantor cannot change or discontinue the trust or recover assets transferred from the trust.

Trusts are used: 

  • To provide management of assets for the benefit of minor children, assuring the grantor that children will benefit from trust assets.  They will not have control of the trust assets until the child is at least age of maturity.
  • To manage assets for the benefit of a disabled child, without disqualifying the child from receiving government benefits.
  • To provide for the grantor’s children from a previous marriage.
  • As an alternative to a will (a “revocable living trust”).
  • To reduce estate taxes and, possibly, income taxes.
  • To provide for a surviving spouse during his/her lifetime, with the remaining trust assets passing to the grantor’s other named beneficiaries at the surviving spouse’s death.

Trusts are complex legal documents and are not appropriate in all situations. Before establishing a trust, you should seek qualified legal advice.

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Avoiding Probate

Probate is simply the Latin word for prove, which means that the estate probate process is the process by which your will is brought before a court to prove that it is a valid will. The courts charged with this responsibility are generally known as probate courts, which may actually supervise the administration or settlement of your estate.

Supervision of the estate settlement process by the probate court can result in additional expense, unwanted publicity and delays of a year or more before heirs receive their inheritance. The publicity, delays and cost of probate motivate many people to explore ways in which to avoid or minimize the impact of probating a will, including:

State Statute

  • If specific requirements are met, many states have made provision for certain estates to be administered without the supervision of the probate court, resulting in less cost and a speedier distribution to heirs.

Form of Property Ownership

  • The joint tenancy form of holding title to property allows ownership to pass automatically to the surviving joint tenant, who is normally the surviving spouse.

Transfer on Death

  • Many states have enacted Transfer on Death statutes that allow a person to name a successor owner at death on the property title certificate for certain types of property, including real estate, savings accounts and securities.

Life Insurance

  • Unless payable to the estate, life insurance proceeds are rarely subject to the probate process.

Lifetime Giving

  • Gifts given during life avoid the probate process, even if made shortly before death.

Trusts

  • A “Totten” trust, which is a bank savings account held in trust for a named individual, can be used to pass estate assets at death outside of the probate process.
  • A revocable living trust, created during the estate owner’s lifetime, can be an effective way to avoid the expense and delay of probate, while retaining the estate owner’s control of his or her assets prior to death.

Proper planning may serve to minimize the impact of the probate process on your estate and heirs.

Any potential method of avoiding probate, however, should be evaluated in terms of its income and/or estate tax consequences, as well as its potential impact on the estate owner’s overall estate planning goals and objectives.

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An Income Annuity Solution

How Can an Income Annuity Protect Against the
Risk of Living Too Long?

The purpose of an annuity is to protect against the financial risk of living too long…the risk of outliving retirement income…by providing an income guaranteed* for life.

In fact, an annuity is the ONLY financial vehicle that can systematically liquidate a sum of money in such a way that income can be guaranteed for as long as you live!

Here’s How an Income Annuity Works:

The annuity owner pays a single premium to an insurance company.

  • Beginning immediately or shortly after the single premium is paid, the insurance company pays the owner/ annuitant an income guaranteed to continue for as long as the annuitant is alive. There are other payout options also available.
  • With a cash refund provision the insurance company pays any remaining funds to the designated beneficiary after the annuitant’s death.

Seeking a secure life long retirement income?  Click the video box to left of this post.

 

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RMDs a Danger to Retirement Plans?

Government regulations dictate senior’s retirement income plans.  The question; Is this government “retirement plan” the best option?

If they have a traditional IRA, 401(k) and/or any other qualified retirement plan they must take Required Minimum Distributions (RMD) upon reaching age 70- 1/2.  If they do not take RMD as required the penalty is a harsh 50%.  Most seniors follow the RMD plan so it must be the optimal way to receive retirement income… Right?

The new reality is nothing could be further from the truth.  Expected longevity continues to increase well past the I.R.S. life tables used to calculate RMD withdrawals.  This could  set up a dangerous financial situation later in life.

The alternative solution and one most seniors have not considered  is a Life Income Annuity.  Rollovers from IRAs and 401(k)s are easy and there are no taxes due or 10% penalty even if income is started before age 59.

Advantages of Life Income Annuities are significant and perform better than RMD plans:

  1. After enduring a decade of sub economic performance, low interest rates,  disappearing pensions and a decreasing Social Security trust fund seniors need protection from steep market swings. Income annuities eliminate market risk by providing a steady monthly pay check.
  2. Saves the golden decade of retirement; the 10 years from age 70 – 80.  RMDs are scheduled to be lower during this time and increase later.  The lifetime annuity has on average a 60% higher payout  during the golden decade and guarantees these payments for life with any remaining principal paid to beneficiaries.
  3. Prevents the RMD crash.   A typical life income annuity starts payments at age 70 about 60% higher than RMD withdrawals.  It is true RMDs increase with age but assuming a 3% growth rate at their peak they  will provide an income 15% lower than the annuity.  After the RMD’s peak withdrawal years the  annual income begins decreasing until the money runs out.

Lifetime annuities take the RMD drop off  and longevity risk away while offering a higher payout.

For help you may ask questions in the comments

Or contact me privately: Tim Barton Chartered Financial Consultant

 

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Freedom Horse and Retirement

The horse (Mariska) in this video has been dubbed “Houdini Horse”. What’s not like about a horse or anyone else’s desire for freedom?

The lust for freedom is a natural yearning programmed right into the core of our DNA. Over time life experiences such as raising a family and career may have dulled this desire. However, I don’t think the desire to be free and do what you want on your own schedule ever goes away.

When I am asked “What is number one motivation to retire?” The soon to be retirees I work with express a desire to get off the treadmill, stop producing for someone else, travel when they want or to simply reassert control of their daily schedule. Everyone who works has a vision of their perfect retirement which almost always includes maximum personal freedom.

Apparently Mariska A.K.A. Houdini Horse not only wants personal freedom she wants freedom for all her companion horses as well.

The market crashes and low interest rates during the last decade have put serious crimps in many retirees’ personal retirement freedom. Some have had to work part time jobs others have had to cut back their spending in order to keep the household budget balanced, crimps to retirement freedom.

Unfortunately many financial planners are still using outdated retirement income models from the 90’s and because these models do not work in the “new normal” they are exposing their client’s retirement freedom to unnecessary risk. As I have written in several posts it does not have to be this way. The tools are available to help retirees maintain retirement freedom.

Comment below or privately Contact Tim Barton

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4% Rule or a Lifetime Income Annuity

Outliving one’s assets is a major concern for today’s retirees. One common approach to address this concern has been the “4% rule,” which is a generally accepted rule of thumb in financial planning for retirement income. It says to withdraw no more than 4% of an asset in retirement annually, and then increase the withdrawn amount by 3% each year to help offset the effects of inflation. Many believe the 4% rule provides a strong likelihood for retirement assets to last 30 or more years.

One problem with the 4% rule is that it does NOT GUARANTEE you won’t run out of money. In fact, with today’s historic market volatility and longer life expectancies, it’s predicted that up to 18 out of 100 people WILL RUN OUT OF MONEY in retirement using the 4% rule.

What if there was a different strategy that could provide the same amount of retirement income as the 4% rule and might even require fewer assets to do so? Additionally, this strategy would protect your income from market loss and GUARANTEE that income would last throughout your lifetime.

This strategy exists today and can be implemented using a fixed index annuity with a guaranteed lifetime income benefit or a secure lifetime retirement income annuity.

For help you may ask questions in the comments

Or contact me privately here: Tim Barton Chartered Financial Consultant

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What Do Pianos Have to Do With Annuities?

In the 1960s and 70s the nation’s largest keyboard company  Baldwin Piano & Organ Company began expanding into banking and insurance eventually creating a large conglomerate of financial services companies.  In 1977 Baldwin merged with United Corp., an investment company, and became Baldwin-United Corp.

Unfortunately for buyers, these contracts proved to be unsustainable and directly contributed to the bankruptcy of Baldwin-United in 1983.  In fact, the $9 billion in liabilities of Baldwin-United exceeded the combined debt of the four previous largest bankruptcies up to that point. 

In the 1983 the states of Indiana and Arkansas took over the majority of Baldwin-United’s assets and began the long process of rehabilitating the two insurance carriers and distributing assets to policyholders.

According to a recent Wall Street Journal article companies

“betting they can wring more profit from annuity contracts” than traditional insurance companies.

Another article in Bloomberg Business Week quotes Benjamin Lawsky, New York State superintendent of financial services

 “Their focus is on maximizing their immediate financial returns, rather than ensuring that promised retirement benefits are there at the end of the day for policyholders,”

Important questions to ask about insurance companies you are considering doing business with.

  • Are they controlled by outside entities that don’t have an insurance background or experience?
  • Do they offer products with features and rates that are far above what the competition is offering?

 The lessons from the past should be kept in mind.

Properly managed insurance companies are among the safest places for your retirement dollars even in the example of Baldwin-United the state guaranty associations made the policyholders whole.  This process is time consuming so it wise to research companies you are considering.