Retirement – Safe Retirement Income

January 18, 2019 by Tim Barton Leave a Comment

The Sequence of Returns Can Make or Break a Retirement Portfolio

You’ve invested over the years and now you’re ready to retire and withdraw income from your retirement nest egg. How long will your money last? There are a number of variables at play, but one you should know is the sequence of returns. If you start taking income withdrawals from your portfolio in a down market, and continue that course without making adjustments, your money may not last as long as you need it to.

Early Negative Returns vs. Early Positive Returns Hypothetical Example

Jim, age 65, has $500,000 in savings invested in an index fund that mirrors the performance of the S&P 500®. He begins to withdraw 5% each year for income.

Compare the difference in his portfolio balance in the graph below. In each scenario, the average annual rate of return is 4.95 percent. But starting withdrawals in years with negative returns yields a very different portfolio outcome than when withdrawals begin in years with positive returns.

At age 83, Jim has only $20,134 left in account value (scenario A), when withdrawals began in a negative market. In scenario B, Jim has $477,147 in account value after 18 years, a difference of $457,013. More portfolio account value is preserved when withdrawals begin in years with positive returns. See the detailed annual account value charts on the reverse.

August 4, 2018 by Tim Barton Leave a Comment

8 Ways to Payday

Retirees like income. So they want to know the many ways an annuity may pay. Confidence comes with knowing how an annuity may pay to help meet your financial needs.

Withdrawals. You can access your money any time. Beginning immediately, up to 10% of the accumulated value annually without a surrender charge.
Annuitization. Convert a lump sum into income guaranteed for your life, or your life and another person’s.
Payout Options. Immediate annuities offer payout options for specific amounts or periods; plus, increasing payout options to help address inflation over time.
SEPPs. Substantially Equal Periodic Payments taken at least annually for 5 years and to the age of 59 1/2 are not subject to the 10% IRS penalty tax on withdrawals before age 59 1/2.
Combination Plans. Pair two annuities–one generates immediate income, one pursues accumulation.
RMDs. Required Minimum Distribution programs pay the amount IRA owners and qualified plan participants must take yearly from accounts starting by age 70 1/2.
Death Benefit. Distributions upon death provide payouts and may extend tax-deferral benefits for a beneficiary’s life.

Commutation. Provides a lump sum from an immediate annuity for unforeseen life events while continuing reduced regular payments.

For confidence, it pays to plan for retirement with an annuity.

May 4, 2016 by Tim Barton Leave a Comment

About Advanced Directives

Advance Directives are a way to “have your say” about the type of care you receive (or don’t receive) in the event you suffer a catastrophic medical event, such as a stroke or an accident, that leaves you unable to communicate your wishes. Every adult should plan ahead by completing an Advance Directive that specifies his or her personal preferences in regard to acceptable and unacceptable medical treatments. There are two types of Advance Directives:

Living Will

A Living Will states your preferences regarding the type of medical care you want to receive (or don’t want to receive) if you are incapacitated and cannot communicate. You specify the treatment you want to receive or not receive in different scenarios.

Medical Power of Attorney

Also known as a durable power of attorney for health care or a health care proxy, a Medical Power of Attorney names another person, such as your spouse, daughter or son, to make medical decisions for you if you are no longer able to make medical decisions for yourself, or you are unable to communicate your preferences.

Note that a Medical Power of Attorney is not the same as a Power of Attorney, which gives another person the authority to act on your behalf on matters you specify, such as handling your financial affairs.

Important Points to Remember

Each state regulates Advance Directives differently. As a result, you may wish to involve an attorney in the preparation of your Advance Directive
You can modify, update or cancel an Advance Directive at any time, in accordance with state law.
If you spend a good deal of time in several states, you may want to have an Advance Directive for each state.
Make sure that the person you name to act for you – your health care proxy – has current copies of your Advance Directive.
Give a copy of your Advance Directive to your physician and, if appropriate, your long-term care facility.

May 2, 2016 by Tim Barton Leave a Comment

What’s the Problem with a Pile of 401(k) Money?

Smart retirement planning has become all about the income, as in how much and for how long. Last year the Journal of Financial Planning conducted extensive research into retirement portfolio withdrawal rates. They concluded the traditional 4% rule was too risky because it leaves a retiree with an 18% chance of portfolio failure; that’s about a one in five failure rate.

Retirement income failure (running out of money before you die) is disastrous. In the financial planning business they call it “portfolio failure”

Portfolio failure is another way saying “sorry your money is all gone”. Very bad news to someone in their 70’s potentially looking at many more years of life by surviving only on Social Security each month.

What is the problem with money in a 401 (k)?

It must be withdrawn and a safe withdrawal rate must be determined.

What is the new safe withdrawal rate?

2.52% According to the Journal of Financial Planning.

Retirement income money that is invested in equities; stock market, mutual funds, ETF, variable annuity etc. has an 18% chance of failure if the retiree withdraws more than 2.52% per year.

What is the solution?

With interest rates hovering around 1% certainly not bonds or certificates of deposit.

That leaves fixed annuities because they can insure a retirement income for life. But their rates are also low and the income is sometimes level with no chance of increase.

Enter the time tested fixed index annuity with income options. An indexed annuity can offer a guaranteed withdrawal percentage increase, meaning each year you own an indexed annuity the percentage you can withdraw goes up; some as high as 7%.

Let’s compare the recommended 2.52% equity withdrawal and 7% index annuity withdrawal using a nice round figure like $100,000.

2.52% of $100,000 provides a safe income of $2520 per year.

Whereas the annuity’s 7% withdrawal is $7000 per year guaranteed for life and this $7000 could go up each year if there is an index interest credit and once it goes up, it is guaranteed to stay up.

3 choices are:

Unsafe withdrawal using the antiquated 4% rule and risk running out of money 1 out of 5 times. ($4000 per year)
The new “safe” 2.52% rule ($2520 per year)
The insured, guaranteed 7% index annuity ($7000 per year)

Which choice do you prefer?

For help you may ask questions in the comments

Or contact me privately: Tim Barton Chartered Financial Consultant

August 1, 2015 by Tim Barton 6 Comments

Medical Annuities Pay More

You are wondering what to do after your doctor explains you have a serious medical condition. Not only is the thought of living out your remaining time, perhaps a bit impaired disturbing, you and your spouse are wondering how to make your money last. With the possibility of a future filled with increased medical bills and current yields at record lows, you fear your savings are going to have to be drawn down to the point of depletion.

A possible solution is the medically underwritten annuity. When applying for a medical annuity you provide your medical records to the insurance company who will then review them to determine your actuarial age.

After determining the actuarial age it is compared to your chronological age and if actuarial age is greater the annuity’s monthly income is increased accordingly. This adjustment can be done jointly even if your spouse’s health is good.

It has always been important and more so in this low interest rate environment to make sure a retiree’s savings lasts the rest of their and their spouse’s life. The effort put into getting quotes on a medical annuity can bring a welcome peace of mind making it time well spent

On the positive side; medical science continues to advance at a fast pace so the initial prognosis could in the end, turn out to be wrong, in which case you get to enjoy good health and a higher than normal lifetime income stream.

You may ask questions in the comments or contact me privately:

Tim Barton

Chartered Financial Consultant

March 25, 2015 by Tim Barton Leave a Comment

Remember Retirement When You Change Jobs

WHEN YOU CHANGE JOBS

You May Have an Important Decision to Make…

What to do with your money in an employer-sponsored retirement plan, such as a 401(k) plan. Since these funds were originally intended to help provide financial security during retirement, you need to carefully evaluate which of the following options will best ensure that these assets remain available to contribute to a financially-secure retirement.

Take the Funds:

You can withdraw the funds in a lump sum and do what you please with them. This is, however, rarely a good idea unless you need the funds for an emergency. Consider:

A mandatory 20% federal income tax withholding will be subtracted from the lump sum you receive.
You may have to pay additional federal (and possibly state) income tax on the lump sum distribution, depending on your tax bracket (and the distribution may put you in a higher bracket).
Unless one of the exceptions is met, you may also have to pay a 10% premature distribution tax in addition to regular income tax.
The funds will no longer benefit from the tax-deferred growth of a qualified retirement plan.

Leave the Funds:

You can leave the funds in your previous employer’s retirement plan, where they will continue to grow on a tax-deferred basis. If you’re satisfied with the investment performance/options available, this may be a good alternative. Leaving the funds temporarily while you explore the various options open to you may also be a good alternative. (Note: If your vested balance in the retirement plan is $5,000 or less, you may be required to take a lump-sum distribution.)

Roll the Funds Over:

You can take the funds from the plan and roll them over, either to your new employer’s retirement plan (assuming the plan accepts rollovers) or to a traditional IRA, where you have more control over investment decisions. This approach offers the advantages of preserving the funds for use in retirement, while enabling them to continue to grow on a tax-deferred basis.

Why Taking a Lump-Sum Distribution May Be a Bad Idea:

While a lump-sum distribution can be tempting, it can also cost you thousands of dollars in taxes, penalties and lost growth opportunities…money that will not be available for future use in retirement.

February 19, 2015 by Tim Barton Leave a Comment

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?

January 25, 2015 by Tim Barton Leave a Comment

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.

August 14, 2014 by Tim Barton Leave a Comment

What is the Marital Deduction?

What Is the Marital Deduction?

The marital deduction (I.R.C. Sections 2056 and 2523) eliminates both the federal estate and gift tax on transfers of property between spouses, in effect treating them as one economic unit. The amount of property that can be transferred between them is unlimited, meaning that a spouse can transfer all of his or her property to the other spouse, during lifetime or at death, and completely escape any federal estate or gift tax on this first transfer. However, property transferred in excess of the unified credit equivalent will ultimately be subject to estate tax in the estate of the surviving spouse.

The 2010 Tax Relief Act, however, provided for “portability” of the maximum estate tax unified credit between spouses if death occurred in 2011 or 2012. The American Taxpayer Relief Act of 2012 subsequently made the portability provision permanent. This means that a surviving spouse can elect to take advantage of any unused portion of the estate tax unified credit of a deceased spouse (the equivalent of $5,000,000 as adjusted for inflation; $5,340,000 in 2014). As a result, with this election and careful estate planning, married couples can effectively shield up to at least $10 million (as adjusted for inflation) from the federal estate and gift tax without use of marital deduction planning techniques. Property transferred to the surviving spouse in excess of the combined unified credit equivalent will be subject to estate tax in the estate of the surviving spouse.

If the surviving spouse is predeceased by more than one spouse, the additional exclusion amount available for use by the surviving spouse is equal to the lesser of $5 million ($5,340,000 in 2014 as adjusted for inflation) or the unused exclusion of the last deceased spouse.

What Requirements Apply to the Marital Deduction?

To qualify for the marital deduction, the decedent must have been married and either a citizen or resident of theU.S. at the time of death. In addition, the property interest (1) must be included in the decedent’s gross estate, (2) must pass from the decedent to his or her surviving spouse and (3) cannot represent a terminable interest (property ownership that ends upon a specified event or after a predetermined period of time).

March 6, 2014 by Tim Barton Leave a Comment

Difficult Pension Benefit Decision

At retirement, if you have a pension, you have to make a difficult decision that could negatively impact your future financial security and that of your spouse. Most people with company pension plans give this decision little thought and simply select the first payout option listed on their pension estimate; Joint and Equal Survivor Option.

For example, assume your maximum lifetime pension benefit is $2,000 monthly.

With the joint and equal survivor option, you’ll receive a significantly lower lifetime pension payment. Your surviving spouse, however, will continue to receive 100% of your pension benefit if you die first.

For as long as you live, you receive 75% of $2,000 the maximum life income option benefit. Your benefit is reduced to $1,500 per month, for life.
If you die first, your spouse will receive a lifetime monthly pension benefit equal to 100% of your benefit, or $1,500 per month.
If your spouse dies first you will continue to receive $1500 per month. There is generally no going back to the maximum $2,000 benefit.

Second choice is – Joint and One-Half Survivor Option:

If you elect the joint and one-half survivor option, you’ll receive a lower lifetime pension payment. On the other hand, if you die first, your surviving spouse will continue to receive a lifetime pension benefit equal to 50% of your pension benefit prior to your death. For example:

For as long as you live, you receive a monthly pension benefit of $1,700 or about 85% of the maximum life income option benefit.
If you die first, your spouse will receive a lifetime monthly pension benefit equal to 50% of your benefit, or $850 per month.
If your spouse dies first, however, your monthly pension benefit remains at $1,700.

Next choice is – Life Income Option:

If you receive your pension benefit under the life income option, you receive the maximum lifetime pension payment. If you die first however, your surviving spouse receives nothing after your death. For example

For as long as you live, you receive a monthly pension benefit of $2,000.
If you die first, however, your spouse will receive a monthly pension benefit of $0.
If your spouse dies first, your monthly pension benefit remains unchanged at $2,000.

At retirement, you will have to decide how your pension benefit will be paid out for the rest of your life:

If you elect to receive the maximum retirement check each month for as long as you live, with the condition that upon your death, your spouse gets nothing.
If you elect to receive a reduced retirement check each month, with the condition that upon your death, your spouse will continue to receive an income.
This pension decision is permanent.
The decision you make will determine the amount of pension income you receive for the rest of your life.
The decision is generally irreversible.
In making this decision, many people unknowingly purchase the largest death benefit (life insurance) they will ever buy and one over which they have no control.

How Can Retirement Income Protection Help Solve the Pension Benefit Dilemma?

Federal law allows a pension plan participant to waive the “joint and survivor” annuity payout requirement, with the written consent of his or her spouse. This means that, with your spouse’s consent, you can elect to receive the MAXIMUM life income annuity payout at your retirement.

However, what happens to your surviving spouse’s income and lifestyle if you should die first?

The solution, you maintain sufficient life insurance to replace the pension income lost at your death, assuring that your spouse will have an adequate source of income after your death. This is a death benefit you control and if your spouse predeceases you the life insurance can be surrendered paying you back part or all of your premiums; Depending on when death occurred.

In making this important decision, you should evaluate the risks associated with retirement income protection funded with life insurance:

Your income after retirement must be sufficient to ensure that the life insurance policy premiums can be paid and coverage stay in force for your lifetime. Otherwise, your spouse may be without sufficient income after your death.
If your pension plan provides cost-of-living adjustments, will upward adjustments in the amount of life insurance be needed to replace lost cost-of-living adjustments after your death?
Does your company pension plan continue health insurance benefits to a surviving spouse and, if so, will it do so if you elect the life income option?