Safe Retirement Income

Your Retirement Depends on It

Tim Barton, Chartered Financial Consultant

Pepin Wisconsin
715-220-4866

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The Sequence of Returns Can Make or Break a Retirement Portfolio

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.

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9 Facts of Life Insurance

9 Facts of Life Insurance

Interesting life insurance facts you can share with your friends and family

Some of the facts and statistics from a recent LIMRA report, “The Facts of Life and Annuities, ”1 are real eye-openers and help tell the story of how important life insurance is.

Facts shared in the report:

Life insurance

  • Most individual life insurance policies in force are permanent rather than a term policy,
  • Permanent life insurance benefits Americans of all income levels, not just the affluent (those with a household income of $100,000 or more).
  • Ninety-five percent of life insurance beneficiaries are satisfied with the overall service provided by the insuring company.

The life insurance industry

  • Life insurers infused $63 billion into the U.S. economy in 2012 through death benefits paid to beneficiaries.
  • Life insurers infused $72 billion of annuity benefits into the U.S. economy in 2012.
  • The life insurance industry generates approximately 2.5 million jobs in the U.S., including direct employees, those who sell life insurance products, and non-insurance jobs supported by the industry.
  • One of every five dollars of Americans’ long-term savings is in life insurance and annuities.
  • Life insurers provide a significant source of funding to consumers and businesses. As of the end of 2012, life insurers held $322 billion in commercial and residential property loans.
  • Life insurers have $4.5 trillion invested in the U.S. economy, making them one of the most significant sources of capital in the nation.

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She Solved Her Retirement Needs. And So Can You

Need retirement income you can’t outlive? Have coffee with Meg. Take a video break and learn how Meg uses a single premium immediate annuity (SPIA) to alleviate concerns about outliving her retirement assets and being unable to meet monthly expenses.

Retire with Confidence

People are living longer than ever before, meaning that unpredictable market performance, higher health care costs, and rising inflation could impact your retirement nest egg. Social Security is in question, and you may or may not have a pension.
The reality is, many individuals may not be able to maintain their standard of living — or worse  — may run out of money during retirement.

Live Comfortably with Retirement Income- Consider the risks that can affect your retirement and life:

  • Lifespan – Living longer and outliving your retirement money.
  • Inflation – Cost of living increases that erode your retirement buying power.
  • Fluctuation – Market volatility that impacts your retirement assets.
  • Experience – Life events that require retirement plan flexibility.

At what rate can you safely withdraw from your portfolio to address these risks?

  • According to the Journal of Financial Planning, the safe withdrawal is 2.52%.

Contact www.TimBarton.net

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About Advanced Directives

About Advanced Directives

Advance Directives are a way to “have your say” about the type of care you receive (or don’t receive) in theautumwalk 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.

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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

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Gifts of Life Insurance

Gifts of Life Insurance

InfoRegardless of your reasons for giving, a gift of life insurance can represent a substantial future gift to a favorite charity at relatively little cost to you. You can:

Make a Charity the Beneficiary of an Existing Policy: If you have a life insurance policy you no longer need, you can name the charity as the beneficiary of the policy, meaning that the charity will receive the policy’s death benefit after you die. While there are no current tax benefits to this approach, the value of the policy will be removed from your estate for federal estate tax purposes.

Make a Charity the Owner and Beneficiary of an Existing Policy: Instead of simply naming the charity as beneficiary of an existing life insurance policy, you transfer full ownership of the policy to the charity. The charity will then receive the policy’s death benefit after you die. In addition to removing the value of the policy from your estate for federal estate tax purposes, this approach also provides you with current federal income tax deductions.

Help a Charity Purchase a New Insurance Policy on Your Life: If you wish to make a substantial future gift to a charity at a relatively low cost to you, another alternative is to consider purchasing a new life insurance policy and name the charity as the policy owner and beneficiary. You then arrange to pay the premiums through gifts to the charity. This approach provides federal income tax deductions and the policy proceeds are not included in your estate for federal estate tax purposes.

Important Note: Most states through their “insurable interest” laws allow a charity to be the owner and/or beneficiary of an insurance policy on a donor’s life. Since state laws do vary, however, it is important to consult with a professional advisor before making a gift of life insurance to a charity. Please contact my office if we can be of assistance.

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7 Methods to Avoid 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:

  1. 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.
  2. 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.
  3. 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.
  4. Life Insurance Unless payable to the estate, life insurance proceeds are rarely subject to the probate process.
  5. Lifetime Giving Gifts given during life avoid the probate process, even if made shortly before death.
  6. 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.
  7. 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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Probate Process for Your Estate

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.

The probate process is governed by state statutes that are intended to accomplish three primary objectives:

  1. To preserve estate assets.
  2. To protect the rights of creditors in the payment of their claims before the estate is distributed to the heirs.
  3. To assure that the heirs receive their inheritance in accordance with the terms of the estate owner’s will.

Once the estate’s personal representative (executor or administrator if the estate owner died without naming a personal representative) is approved by the probate court and posts any bond that is required, the probate process generally proceeds as follows:

  • The personal representative must “prove up” the will — prove that it is a valid will signed by the estate owner who was competent and not under duress or influence at the time of signing.
  • Notice must be given by the personal representative to all creditors to make prompt claim for any money owned to them by the estate.
  • The personal representative must prepare and file an inventory and appraisal of estate assets.
  •  The personal representative must manage and liquidate estate assets as appropriate to pay all debts, fees and taxes owed by the estate.
  • Finally, the remaining estate must be distributed to the heirs in accordance with the estate owner’s will (or the state laws of intestacy if there was no will).

It is not uncommon for the probate process to require a year or more and considerable expense before the estate is finally settled.

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

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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.

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Taxable VS. Tax Deferred Investments

How much would you have to earn each year from a taxable investment in order to equal earnings on a tax-deferred investment? This chart illustrates the potential benefits of a tax-deferred investment vs. a taxable investment.

Annual Tax-Deferred Yield Federal Income Tax Bracket:
10% 15% 25% 28% 33% 35%
Annual Taxable Equivalent Yield
3% 3.33% 3.53% 4.00% 4.17% 4.48% 4.62%
3.5% 3.89% 4.12% 4.67% 4.86% 5.22% 5.38%
4% 4.44% 4.71% 5.33% 5.56% 5.97% 6.15%
4.5% 5.00% 5.29% 6.00% 6.25% 6.72% 6.92%
5% 5.56% 5.88% 6.67% 6.94% 7.46% 7.69%
5.5% 6.11% 6.47% 7.33% 7.64% 8.21% 8.46%
6% 6.67% 7.06% 8.00% 8.33% 8.96% 9.23%
6.5% 7.22% 7.65% 8.67% 9.03% 9.70% 10.00%
7% 7.78% 8.24% 9.33% 9.72% 10.45% 10.77%
7.5% 8.33% 8.82% 10.00% 10.42% 11.19% 11.54%
8% 8.89% 9.41% 10.67% 11.11% 11.94% 12.31%
8.5% 9.44% 10.00% 11.33% 11.81% 12.69% 13.08%
9% 10.00% 10.59% 12.00% 12.50% 13.43% 13.85%
9.5% 10.56% 11.18% 12.67% 13.19% 14.18% 14.62%
10% 11.11% 11.76% 13.33% 13.89% 14.93% 15.38%

This chart illustrates the potential benefits of a tax-deferred investment vs. a taxable investment. For example, if an investor in the 25% federal income tax bracket purchases a tax-deferred investment with a 5% annual yield, that investor’s taxable equivalent yield is 6.67%. This means the investor would need to earn at least 6.67% on a taxable investment in order to match the 5% tax-deferred annual yield.

This chart is for illustrative purposes only and is not indicative of any particular investment or performance. In addition, it does not reflect any federal income tax that may be due when an investor receives distributions from a tax-deferred investment.