02/23/15

What is Your Retirement Glide Path?

Bankrate.com, By Dr. Don Taylor , September 8, 2014

I first heard the term “retirement glide path” close to a decade ago at a retirement income workshop. At the time, I thought it was a colorful way to describe the changes in asset allocations in a target-date retirement fund.

Target date funds are mutual funds, and now exchange-traded funds (ETFs) too, that invest in a combination of stocks, bonds and cash equivalents. The asset mix changes as you approach the year or range of years in the fund’s name. In general, the asset allocations become more conservative, with the percentages of bonds and cash investments increasing and the stock allocation decreasing as you approach that target date. These funds have become the “go to” default investment for firms with 401(k) plans.

One of the issues with choosing the target date as the year you expect to retire is that you may have another 30 years of that portfolio being invested to meet your retirement income needs. Decreasing stock investments when you still have a multi-decade investment horizon may protect your portfolio from risk to principal, but it isn’t likely to help protect the purchasing power of that portfolio over time from inflation eroding that purchasing power.

An alternative to a target date fund is a target risk fund or ETF). With a target risk fund, the asset allocations are based on the investor’s risk tolerance. When you’re aging but your attitude towards risk isn’t changing, you can stay in the same target risk fund and the asset allocations won’t change. When you get to the point where you no longer are comfortable with the fund’s asset allocation mix, you switch funds.

Transitioning from an accumulation portfolio during your working career to a distribution portfolio in retirement, where you aren’t contributing to your retirement accounts is a transition point, but your retirement income needs will drive how the portfolio should be invested over time.

You’ll have a decision to make — whether you’re better off in one of these two types of funds/ETFs or with a custom asset allocation determined with the help of a financial professional. There’s not one right decision. That’s why they call it personal finance.

 To Your Successful Retirement!

Michael Ginsberg, JD, CFP® 

02/15/15

How working in retirement impacts Social Security

Market Watch, Stephen Williams, Sept 8, 2014

A “retiree” enjoys the fruits of his labor.

For many people, retirement can be a difficult transition. Some miss the day-to-day camaraderie of work life while others miss that sense of purpose. Having so much free time isn’t as easy as it may seem. There are some instances when financial demands require a return to at least a part-time if not full-time “retirement” career.

Increasingly retirees are shunning traditional retirement and instead are exploring a return to work. Interestingly, studies have shown that longevity increases in places where people stay active during retirement years. Chianti, Italy is often cited as an example, not from drinking the wine as many suspect, but because older people continue to be engaged in family businesses — tending the fields, conducting wine tours and stomping the grapes.

So how does this trend affect one’s Social Security benefits? What are the timing issues and financial considerations that should be taken into account? Let’s look at a fictional, yet very plausible, scenario to better understand the impact of working in retirement on Social Security.

Jimmy retired this year at the age of 63. He immediately began taking his Social Security benefits. Assume Jimmy’s Primary Insurance Amount (PIA) is $2,000. PIA is the monthly Social Security benefit he would receive if he continued working and only began taking his benefit at Full Retirement Age which is age 66 for those retiring in 2014. By choosing to collect his monthly benefit three years before Full Retirement Age, Jimmy receives approximately $1,600 monthly. Shortly after Jimmy turns 64, he decides to go back to work.

*NOTE: Under current Social Security guidelines, there is a maximum 12-month window during which you are allowed to change your benefit election. In our example, Jimmy would have had to change his benefit election while he was still 63. If he had done so, he could have changed to another claiming strategy and paid back the benefits he had already received — like taking a mulligan in golf. By deciding to go back to work after his 12-month window had expired, the following took effect:

  • By working, receiving Social Security benefits AND because he hasn’t reached his Full Retirement Age (FRA), Jimmy is subject to the Annual Earnings Test.

— If he is under FRA for the whole year, then $1 is deducted for every $2 earned above $15,480 in 2014.

Zero If there is a year where he reaches FRA for part of the year, then $1 is deducted for every $3 earned above $41,400 until the month FRA is reached. It’s important to note that the calculation is on earnings — salary and bonus or commissions plus any net income from self-employment. It doesn’t include pension or other retirement income.

Example:

Jimmy earns $35,480 in 2014 while he is 63 years old and taking Social Security benefits.

He has earned $20,000 above the cap ($35,480-$15,480=$20,000), so $10,000 in Social Security benefits is withheld upfront, meaning he wouldn’t receive any benefits in the first six months of 2014.

Once he hits $10,000 in withheld benefits, then benefits resume. Since he has $1,600 in monthly benefits, he would begin receiving those benefits early into the seventh month of the year.

This negative impact on Social Security benefits should not discourage people from returning to the workforce. The reduction in benefit income early in the year should be understood and planned for accordingly. Once Jimmy reaches Full Retirement Age of 66, his future benefit would increase to include benefits withheld and an inflation adjustment. The Annual Earnings Test isn’t a factor if he works after reaching his Full Retirement Age. Also, Jimmy could wait at least until Full Retirement Age to collect Social Security benefits, or even wait until age 70. By waiting until age 70, Jimmy could earn the 8% a year “delayed retirement benefit” from age 66 to 70.

Additionally, by working, it is also possible to increase your Social Security benefit. The benefit calculation is based on the highest 35 years of earnings. Therefore, significant income earned between the ages of 62-66 could replace some of the earlier year earnings that weren’t as high. This could potentially increase the Average Indexed Monthly Earnings which is used to calculate your benefit.

The message is clear. Consider carefully the potential short- and long-term impact on Social Security benefits when you determine a retirement, continuation-of-work or return-to-work strategy that is right for you.

For more information review the publication, “How Work Affects Your Benefits,” on the Social Security website.

To Your Successful Retirement!

Michael Ginsberg, JD, CFP® 

02/9/15

Despite Curve Balls, Most Retirees Manage – The Key: Adjusting Lifestyle to Reduced Income

And now for a little good news.

Most of the stories we read about retirement planning tend to be dominated by “unpleasant realities” and savings goals that can seem like Mount Everest. And then … the brakes go out on the car again.

Indeed, many people head into retirement with little money and little planning. And life has a way of throwing financial or health-related curve balls even when we have planned ahead or think everything is under control.

But the reality is that most people simply find a way to adjust.

Roger Burdette, a married 67-year-old living in Great Falls, Va., is a retiree who didn’t let planning go by the wayside. In his mid-50s, he started tracking how much he would need to live the lifestyle he wanted once he could walk away from the office.

But his investments took a beating during the financial crisis and have been slow to recover. When he retired a year ago from a job as a computer-systems engineer, he realized that if he wants to make his savings last, he needs to live on a tighter budget than he had hoped.

“You think back to when you go to college and you don’t have a lot of money, so you’ve got to find ways to make it go farther,” he says. “It’s the same approach for retirement.”

Mr. Burdette’s views found their way into a recent sampling of retirees published by T. Rowe Price Group, the mutual-fund company. The survey focused on individuals who had stopped working in the past one to five years and who had a 401(k) plan or an individual retirement account that had been rolled over from a 401(k).

Fewer than one in five said their post-retirement income matched their pre-retirement paycheck. Instead, on average, their retirement income was just 66% of what they had been making. “There’s a focus on whether you should target 80% or 85% of your pre-retirement income,” says Anne Coveney, a vice president at T. Rowe Price. But she says it was a “reality check” to see 52% of respondents say they were getting only 41% to 80% of pre-retirement income.

Along the way, 40% said they have discovered that they can adjust their lifestyle to match their income by a “great deal,” and 37% agreed that the same term applied to the statement: “I don’t need to spend as much as I did before I retired to be satisfied.”

David Hartness, chief client officer at Iron Gate Partners in Wilmington, N.C., says that when clients have to make adjustments, he urges them to consider a big-picture question: “Take a step back and ask, ‘What are the most important things in this new season of life?’”

Usually, the biggest drain on retirement budgets is housing. Mr. Hartness suggests to some clients that they look beyond just selling a big house and buying a smaller one, and consider renting.

“There are a lot of places where you can rent and have full amenities like a country club,” he says, without having to be responsible for the upkeep of a house.

He also has found that many clients can drop the hefty bills that come with golf-club memberships and still get in plenty of tee time. He tells of one client who dropped her membership and has ended up playing more golf since, as friends have invited her to join them.

In the background, current retirees don’t have to be as reliant on their savings as will likely be the case in years to come. Vanguard Group released a similar survey of retirees with investment accounts this year and found that 20% of household incomes in its sample were coming from pensions and 28% from Social Security.

“Everyone is talking about the new retirement,” where retirees have to fund their lifestyles out of savings, “but it’s not here yet,” says Steve Utkus, director of Vanguard’s Center for Retirement Research.

Mr. Burdette uses Social Security income as the base for his budgeting and has tried to adjust his fixed expenses down to match what he gets from the government.

Downsizing to a small house is central to his revised plan. “We’re going to have to live a little more modestly,” Mr. Burdette says.

He’s also looking at holding on to his current car longer than might have otherwise been the case.

But all told, Mr. Burdette counts himself as satisfied in retirement, having turned a hobby of numismatic research into an area to which he can devote more time.

In the T. Rowe Price survey, some 90% of respondents said they are “very satisfied” or “somewhat satisfied” with their retirement. Of course, many people do struggle, especially when retirement is forced on them earlier than expected for health reasons. And the T. Rowe Price survey found that unmarried women among respondents tended to have a harder time making ends meet.

But for the most part, says Ms. Coveney, “retirees are making it work and being flexible with their spending in the early years of their retirement.”

To Your Successful Retirement!

Michael Ginsberg, JD, CFP® 

02/2/15

Boomers Are Hoarding Cash in Their 401(k)s – Here’s a Better Strategy

Yes, you need a cash reserve in retirement, but you can go overboard in the name of safety. Here’s how to strike the right balance.

As you close in on retirement, it’s crucial to minimize the risk of big losses in your portfolio. Given how expensive traditional safe havens, such as blue chips and high-quality bonds, have become, that’s tricky to do today. So for many pre-retirees, the go-to solution is more cash.

How much cash is enough? Many savers seem to believe that today’s high market valuations call for a huge stash-the average investor has 36% in cash, up from 26% in 2012, according to a recent study by State Street. The percentage is even higher for Baby Boomers (41%), who are approaching retirement-or already there.

That may be too much of a good thing. Granted, as you start to withdraw money from your retirement savings, having cash on hand is essential. But if you’re counting on your portfolio to support you over two or more decades, it will need to grow. Stashing nearly half in a zero-returning investment won’t get you to your goals.

To strike the right balance between safety and growth, focus on your actual retirement needs, not market conditions. Here’s how:

Safeguard your income. If you have a pension or annuity that, along with Social Security, covers your essential expenses, you probably don’t need a large cash stake. What you need to protect is money you’re counting on for income. Calculate your annual withdrawals and aim to keep two to three years’ worth split between cash and short-term bonds, says Marc Freedman, a financial planner in Peabody, Mass.  That lets you ride out market downturns without having to sell stocks, giving your investments time to recover.

This strategy is especially crucial early on. As a study by T. Rowe Price found, those who retired between 2000 and 2010 – a decade that saw two bear markets – would have had to reduce their withdrawals by 25% for three years after each drop to maintain their odds of retirement success.

Budget for unknowns. You may be able to anticipate some extra costs, such as replacing an aging car. Other bills may be totally unexpected – say, your adult child moves back in. “People tend to forget to build in a reserve for unplanned costs,” says Henry Hebeler, head of AnalyzeNow.com, a retirement-planning website.

In addition to a two- to three-year spending account, keep a rainy-day fund with three to six months of cash. Or prepare to cut your budget by 10% if you have to.

Shift gradually. “For pre-retirees, the question is not just how much in cash, but how to get there,” says Minneapolis financial planner Jonathan Guyton. Don’t suddenly sell stocks in year one of retirement. Instead, five to 10 years out, invest new savings in cash and other fixed-income assets to build your reserves, Guyton says. Then keep a healthy allocation in stocks – that’s your best shot at earning the returns you’ll need, and you can replenish your cash account from those gains.

To Your Successful Retirement!

Michael Ginsberg, JD, CFP®