04/27/15

Americans Defy Warnings, Still Retiring Early

Thinkadvisor.com, March 26, 2015, David Weldon

From congressional hearings, to research studies, to countless media reports, one would think the American worker would be getting the message that most need to stay longer in the workforce before retiring. But that isn’t at all the case, a new study confirms.

Indeed, the average retirement age for men today is 64, and for women, 62. Neither average is making it anywhere close to the new recommended retirement age of 70, let alone the earlier Social Security targets of 65 or 67. “Today’s average retirement ages are just about where they were a decade ago, suggesting that some of the factors spurring the turnaround since the 1980s may have exhausted themselves,” said Alicia H. Munnell, of the Center for Retirement Research (CRR) at Boston College.

This month the CRR updated its average retirement age projections, looking at data going back to 1962. In its report, “The Average Retirement Age – An Update,” the CRR found that the average retirement age for men has remained fairly stable during that entire time – ranging from 62 percent to 65.5 percent for the four decades.

There is some good news with the statistics for women, which have increased dramatically during that time overall, from 52.5 percent in 1962 to the current 62 percent. Still, the numbers for women have leveled off the past decade, when they had increased to 60 percent.

Munnell said she was very surprised by the center’s most recent findings. Like most people, she said, the expectation was that retirement ages would be on the rise. “For people to be secure in retirement they really have to work longer,” Munnell said. “There have been a lot of factors that encouraged people to increase their workforce activity and I thought those things would have been just chugging along, pushing everything up continuously. But they don’t seem to have.”

The CRR study examined a number of factors that could impact retirement age, including anticipated healthcare considerations, labor force participation, and the benefit of employer pension plans. “This was really an opportunity to update the numbers, to see what is happening, and to see if the average retirement age was continuing to rise, or whether some of the factors that had led to the rise were petering out,” Munnell said of the new study. “Basically, our sense, my sense, was that there were a lot of things turning the patterns around in the late 80s, early 90s, and that a lot of those forces may have run their course and things seemed to be leveling out.”

That may be why so many Americans are said to be ill-prepared for retirement, with too little savings, and too few options on how to increase retirement income. In response, Munnell said. “the next big push” is needed.

So what caused the first big push when it comes to average retirement ages? “I conclude that most of the mechanical things—the shift from defined benefits to defined contribution plans, high healthcare costs, the desire to wait to age 65 to have Medicare, improved health and longevity, and education—those have sort of worked their magic,” Munnell said. But the impact of those factors has run their course, she believes.

“I don’t know the extent to which they take longevity into account,” Munnell said. “I think people are generally aware that we are living longer than we have in the past. But I don’t think people really understand what life expectancy at age 65 is. You have 20 more years on average for both men and women. Half the people are going to live longer than those 20 years. I don’t think there is a clear understanding of how long you may need to support yourself.”

That puts greater pressure on retirement planners, the government, and media, to stress the need for many workers to delay leaving the workforce if they are to maintain their lifestyle in retirement. “I think at this point what is needed is a big educational campaign to clarify that the age at which you get the best benefits from Social Security is age 70, and if you want to maximum that income you should defer collecting as long as you can,” Munnell said.

Despite the need for many to work beyond age 65, even to age 70, not everyone can of course. And there could be any number of reasons why. “Statistically speaking, you ask people when they want to retire and very few say they want to retire before age 64,” said Charlie Harriman, a financial advisor with Cloud Financial Inc. But with 69 percent of Americans retiring before age 64, obviously something is going on here.

“Typically it is due to health issues, job loss, whatever it might be,” Harriman says. “So the fact of the matter is, even though we might think we’re going to work to age 65 or age 70, we’ve got to be prepared for the unknown and the possibility of having to retire early.”

For those workers that can wait, or who really need to wait, the retirement planner needs to play the numbers game with their client. “The biggest thing we would do, if an individual wants to retire today but they really need to wait, is run some analysis. We would really show them why they need to wait, why if they can delay Social Security—and when you delay Social Security you get an 8 percent raise every year—what that 8 percent raise will do for them over the long run,” Harriman said.

There is also a critical factor in all of this that has nothing to do with wealth. It involves time. “There is the one extreme of people that want to retire quite young. And then at the other extreme are those that think they can never retire,” said Evelyn Zohlen, founder and president of Inspired Financial. “Both of those are true and heartfelt, and I would describe them both candidly as uninformed.”

The more informed of the two is unquestionably the person who wants to retire early but doesn’t need to. After all, Zohlen said, golf or bridge can only fill so many hours. The individual has decades still ahead of them. “The person that thinks they are going to retire at age 55 hasn’t thought through what are they going to do every day, seven days a week for the next 40 years of their life,” Zohlen said.

To Your Successful Retirement!

Michael Ginsberg, JD, CFP® 

04/20/15

Market Forces Driving Advisors Towards Riskier Portfolios

Wealthmagnagement.com, Mar 26, 2015 by Ryan W. Neal

New research from Cerulli Associates found that the annuity industry is in the middle of a significant change, and it’s impacting the way advisors craft portfolios. Elizabeth Malin, an analyst at Cerulli, said low interest rates are challenging the traditional strategy of using fixed income to generate retirement income.

Low rates are also putting stress on insurance company balance sheets, with some getting out of the variable annuity business completely. Jackson National, for example, ranked first in VA sales (at $18 billion) through the third quarter of 2014. Then in September the company temporarily suspended sales of its richest living benefit. Others have re-priced products and aren’t including the same rich benefits they did in the past.

The factors are driving advisors away from these products. Cerulli said that VAs have fallen from the most popular retirement income product among advisors in 2011 to fifth in 2014. Fixed income isn’t even on the list anymore. Advisors, who have an average 45 percent of clients older than 65, are instead turning to riskier sources of retirement income.

“Notably, the two most prevalent retirement income products for advisors in 2014 were both equity-based, relying on dividends from individual stocks and equity mutual funds, and as a result, taking more risk than they intend,” said Malin. “Retired investors in particular are likely to be more risk-averse and less able to withstand market downturns.”

Malin recommended advisors use prudent asset allocation and diversification to mitigate these factors. However, the lack of risk-controlled, income-producing options has created a gap in retirement income products. The solution, Cerulli concluded, could be goal-based financial planning, an approach that allows advisors to be more dynamic and interactive and creates opportunity for insurance companies to educate advisors on new products.

“Cerulli believes [goal-based planning] has potential as a solution for investors near or in retirement and beginning to use their investments as a source of income,” Malin said. “We argue that withdrawal rates need to be dynamic, particularly in poor markets, to ensure that retired investors do not eat into their principal. “Given the masses of plan participants approaching retirement with inadequate savings, Cerulli urges asset managers and plan sponsors to create planning tools and education to address this need.”

 To Your Successful Retirement!

Michael Ginsberg, JD, CFP® 

04/13/15

Rethinking the Shift-to-Bonds Strategy

March 26, 2015 Bloomberg.com, by Karen WeiseCarol Hymowitz 

Investment adviser Brett Danko has a warning for a New Jersey couple in their early 50s who’ve sought his help about how to plan for retirement: Either allocate more savings to stocks than fixed income, or risk having to scrimp in old age.

The couple, ages 51 and 53, have about 80 percent of their $1 million retirement savings stashed in government bonds yielding just 1 percent to 2 percent. The rest of their investment is in stocks. “They’ll need to double their nest egg if they want to retire at 67 and have the $80,000 a year they’re hoping to draw from their investments,” says Danko, an adviser at Main Street Financial Solutions in Pennington, New Jersey. “Their risk tolerance is very low, and I don’t want them staring at the ceiling at night and worrying, but if they don’t change how they’re allocating savings, they’ll be worrying in their 80s when they may start running out of money.”

There used to be a simple rule for retirement savers: The percentage of bonds in your portfolio should match your age. Therefore, a 60-year-old would have 60 percent of her retirement stake in bonds. The idea was that, as you aged, you should use bonds—which offer dependable payouts and rarely default—to shield more of your money from the wild swings of the stock market, even if that meant sacrificing potential investment gains. But today, in an era of ultralow interest rates and longer life spans, that one-size-fits-all approach won’t work for many people nearing retirement.

No one really knows what to replace it with. There’s no consensus among professionals about how baby boomers should allocate their savings. That’s apparent in the surprisingly wide variations in the allocations in target-date mutual funds, which automatically reset the mix of stocks, bonds, and cash, depending on what year investors plan to stop working. At the end of 2014, equity allocations in 54 target funds aimed at people retiring in 2015, ranged from 8 percent to 68 percent, Morningstar found.

If you’re devising your own allocation, you’ve got to consider a lot of variables—including life expectancy, health, and other sources of income—and do a lot of guessing. People who keep working into their 70s, or retire at 62 but have a pension that provides guaranteed lifetime income, can afford to keep more money in stocks. A 65-year-old in bad health won’t need to increase her savings as much as someone who’s 65 and might live to 105, says Ann Kaplan, founder of Circle Wealth Management, a New York investment advisory firm. “There’s no cookie-cutter solution,” she says.

Julie Jason, head of the investment management practice Jackson, Grant Investment Advisers in Stamford, Conn., tells clients to spend a lot of time calculating their current annual expenses and what they expect to need in the future to cover housing, food, travel, medical, and other costs. She calls this “demand-based” retirement planning. “The people most at risk are those who don’t know how much they’re spending each month and don’t know their needs vs. wants,” she says.

Once people have a clear idea of their expenses, they can better understand whether they’ll be able to ride out down years in the equity markets. “One person’s flexibility is another’s fixed cost,” says Anthony Webb, senior research economist at the Center for Retirement Research at Boston College. “Is a trip to Paris every year a luxury you can cut out? It depends on who you are.”

Now is a particularly dicey time to be loading up on bonds. If interest rates rise by just 1 or 2 percentage points over the next few years, there will be big losses in the value of some bond portfolios, Main Street’s Danko says. An investor who recently bought a 10-year Treasury note yielding 2 percent would see its value decline almost 9 percent if interest rates rise to 4 percent in the next five years. “I look at the risk-return and don’t find it in long-term bonds right now,” says Danko, who’s telling clients to stick to short-term, which take less of a hit than longer-term bonds when rates rise.

John Sweeney, executive vice president for retirement planning and strategy at Fidelity Investments, advises those in their 50s and 60s to take more risks than they might if interest rates were higher. “We’re asking folks to make sure they aren’t too conservative at a time when interest rates are so low,” he says. “They need some portion of their savings growing, because they don’t know if they’re going to be running a sprint or a marathon as they age—and have to plan for the marathon.”

Many advisers caution against trying to boost income by investing in riskier issues, such as junk bonds. Arden Rodgers, who heads investment adviser Arbus Capital Management in New York, has been counseling a retired couple in their mid-50s who have about $5 million in savings. When he first began working with them a few years ago, about 75 percent of their savings was in government bonds, and they worried about the low interest these bonds were yielding. “Like a lot of retirees, they wanted to live entirely off their interest and dividends and not touch their principal,” Rodgers says. “It’s a psychological issue for a lot of folks who’ve been savers all their lives.”

To get more income, the couple considered buying riskier, high-yield bonds, but Rodgers advised that if they wanted to add risk to their portfolio in hopes of higher returns, they should allocate more to stocks. “Don’t make your bond portfolio more risky, because that’s where you want stability,” Rodgers told them. They’ve gradually reallocated their savings so they now hold only 40 percent in fixed income and 60 percent in stocks.

Wade Pfau, a professor of retirement income at the American College in Bryn Mawr, Pa., recommends building a portfolio of bonds that come due at different times and holding them to maturity—a practice known as laddering. That gives you cash coming in at regular intervals, which lowers the chance that you’d have to sell investments during a market slump to cover unexpected expenses. It also allows you to reinvest money at higher yields if rates are rising.

“They don’t know if they’re going to be running a sprint or a marathon as they age—and have to plan for the marathon.” High-quality dividend-paying stocks can also be an alternative to low-yielding bonds. Eleven of the 30 stocks in the Dow Jones industrial average yielded more than 3 percent as of March 12.

Annuities offer the security of guaranteed lifetime income, letting people take more risks with the rest of their portfolio. Annuities are priced based on prevailing interest rates, though, and low rates make them more expensive. Olivia Mitchell, a professor at the Wharton School at the University of Pennsylvania, says products such as longevity annuities, which defer income down the road—typically to when an investor turns 85—can still be worth it, because they provide peace of mind for people scared of running out of money. New York Life Insurance says a 65-year-old couple could spend $100,000 on an immediate annuity and get $437 a month for the rest of both of their lives, but if they deferred taking the payments for 20 years until turning 85 they could get $2,682 a month for the rest of both of their lives.

About a quarter of people currently in their 60s receive pension income, says the Employee Benefit Research Institute, though that number will decline with future generations, because companies have largely abandoned pensions. One of the best ways to increase a dependable income stream is to delay taking Social Security, says Michael Finke, a professor in the department of personal financial planning at Texas Tech University. He says it’s like buying “a supercheap annuity from the federal government.” Monthly benefits can be 76 percent higher for people who wait until age 70 instead of starting at 62, the earliest allowable age. Fewer than 15 percent of people currently receiving Social Security waited until age 70.

People who need to save more, says Judith Ward, senior financial planner at T. Rowe Price, should consider trying to work longer, which lets them accumulate more savings and delay drawing down their nest egg. “That is not always the answer they want,” she says. People can get creative: Her mother took in a tenant, a family friend who needed a place to stay during college. “It was a nice little income stream for a few years,” Ward says. More broadly, she says, investors can put too much emphasis on their asset mix rather than looking at the bigger-picture questions of how much they’re saving before retirement and how much they’ll spend once they stop working. “The allocation can help on the margin,” she says, “but primarily it is the behavior that is really, really important.”

To Your Successful Retirement!

Michael Ginsberg, JD, CFP

04/6/15

Half of Americans will see their standard of living fall in retirement

Marketwatch.com, Elizabeth O’Brien, Published: Apr 2, 2015

With roughly 10,000 boomers retiring every day, the U.S. retirement crisis is no longer an easily dismissed distant concern. Whether we choose to pay attention or not, American workers’ savings shortfall is a slow-moving hurricane that’s going to hit many of us where we live. By some measures, Americans are less prepared than ever to retire comfortably. A recent brief by the Center for Retirement Research at Boston College examined workers’ wealth-to-income ratios from 1983 to 2013. Tracked by the Federal Reserve, this metric plots workers’ accumulated assets over their income—the higher the ratio, the bigger their financial cushion.

Researchers found that workers’ wealth-to-income trajectory has held steady over the 30 years ending in 2013 when various factors, including the drop in workers covered by pensions, meant it needed to increase in order for workers not to lose ground. “They should have more wealth to compensate, and they don’t,” said Anthony Webb, senior research economist at the Center for Retirement Research.

In 2013, the average 62-to-64-year old had accumulated wealth equal to about three times his income, slightly below the level of 1983. Wealth includes all financial assets, such as 401(k) balances and home equity; income includes wages plus earnings and returns on financial assets. This metric excludes the future value of employer pensions and Social Security.

There’s no magic ratio to guarantee that people will meet their retirement goals, Webb said. Wealth-to-income adequacy depends on a number of factors, including lifetime earnings, health status, and willingness to economize. The Center for Retirement Research simply highlights a disturbing trend: today’s workers should be accumulating more than prior generations, yet they aren’t.

Today’s workers should be socking away more for retirement because the decks are stacked against them in ways that they weren’t 30 years ago. In 1979, 28 percent of all private-sector workers had pensions as their sole retirement plan benefit. Things changed in 2011 when that number dropped to 3 percent, according to the Employee Benefit Research Institute. Back in the early 1980s, double-digit interest rates meant that it was possible for many retirees to live comfortably off of bond income.

Social Security

Changes to Social Security mean that boomers will receive a lower replacement rate—that is, the percentage of pre-retirement income that the benefits replace—than current retirees. And yet, people are living longer than ever before, so future retirees will need to stretch their nest eggs longer than prior generations.

What’s more, out-of-pocket health-care costs are eating up an increasing share of retirees’ incomes at a time when fewer workers have employer-sponsored retiree health-care benefits to make up the difference between what Medicare covers and what they owe.

A recent analysis by HealthView Services, a Danvers, Mass.-based provider of health-care cost data and planning tools, projected that for a 55-year-old couple retiring in 10 years at age 65, health-care costs will gobble up approximately 90% of their lifetime Social Security benefits.

This sobering state of affairs won’t be immediately obvious to the couple, who at 65 will likely still be in relatively good health. But health care costs typically rise at around 5% to 6% a year, and most people consume more of these increasingly pricey services as they age.

Meanwhile, Social Security’s annual inflation raise, based on a broad basket of goods and services known as CPI-W, won’t keep pace. The gap grows over time, to the detriment of older Americans. Between 1985 and 2014, the CPI-W lagged the inflation experienced by households aged 62 and older by 6.5% on a cumulative basis, according to the J.P. Morgan Guide to Retirement’s analysis of Bureau of Labor Statistics data.

Standard of living to fall

The Center for Retirement Research uses Federal Reserve data as the basis for its National Retirement Risk Index. This index measures the likelihood of households to achieve the same standard of living in retirement as they had while working.

Their analysis found that about half of American households will be unable to maintain their standard of living in retirement. This will mean a series of trade-offs at best and sacrifices at worst. It’s one thing to accept a slightly reduced standard of living—say, to be forced to downsize to an apartment when you’d rather remain in the family home. It’s quite another to have to choose between keeping the lights on and buying medicine or food.

To be sure, rosier predictions exist on Americans’ retirement readiness. But these typically rest on rosy assumptions. Studies projecting that Americans are saving enough for retirement typically assume that people will reduce their spending after their children leave home, according to the Center for Retirement Research brief.

Under these projections, parents do not spend more on themselves when their children become financially independent. Instead, they sensibly plow the money they used to spend on their offspring into their retirement fund. Then, when they retire, they continue to spend less than they did when their children were at home. Some retirees will surely follow this prudent pattern, but plenty won’t.

Nitty-gritty

By contrast, the wealth-to-income ratio is a neutral gauge that doesn’t assume a specific behavior. And what it shows is troubling, according to the Center for Retirement Research. Harold Evensky, a financial planner and professor of practice at Texas Tech University, said he gets into nitty-gritty retirement planning once clients get within five years of that milestone. Before clients reach that stage, his standard advice is to save as much as they can.

Evensky, who is 72, worries about the coming retirement crisis and the country that his children and grandchildren will inherit. “One of the nice things about being my age is that I’m not going to have to see a lot of things,” he said. “It’s scary.”

To Your Successful Retirement!

Michael Ginsberg, JD, CFP®