Spending in Retirement is a Balancing Act

By Kelli B. Grant, March 2, 2016 CNBC.com

How to spend down your money may be the missing link in your retirement plan.

Nearly two-thirds of savers approaching retirement don’t have a strategy for which assets to tap first, according to a report from Ameriprise, which surveyed 1,300 baby boomers age 55 to 75. Among those already retired, one-third don’t have a draw-down strategy.

“What’s sort of beaten into our heads is, save, save, save,” said Andrea Blackwelder, a certified financial planner with Wisdom Wealth Strategies in Denver. “It really doesn’t occur to most people, until they get a few months out from retirement, to go, ‘How do I take what I’ve saved and turn it into income?’”

Failing to plan can be an expensive mistake. The wrong spending moves could result in an unnecessarily large tax bill, for example, or deplete your retirement savings more quickly.

Advisors say there’s no one-size-fits-all strategy for what assets to tap, in what order and proportion, and how much in total to withdraw in a given year. That depends on factors such as your asset mix and balances, income needs and age. Your expected timing for claiming Social Security might also affect which draw-down plans.

(See chart below for retirees’ and pre-retirees’ expectations of how much of their income will come from various sources.)

Expected retirement income, by source

Pre-retirees Retirees
Social Security 25% 23%
Pension 16% 31%
401(k) 21% 12%
IRA 13% 12%
Savings/market investments 12% 12%
Annuity payments 4% 5%
Other sources 9% 5%

SOURCE: Ameriprise Pay Yourself in Retirement.

To craft a plan, think long term. “One of the cornerstones of good tax planning is to think about things over more than one tax year,” said certified financial planner Dan Moisand, principal at Moisand Fitzgerald Tamayo in Melbourne, Florida.

For example, tapping taxable brokerage accounts first is often a smart move, because long-term capital gains are cheap tax-wise, at 0 to 20 percent, Blackwelder said. But if you have substantial savings in a retirement account, starting withdrawals before required minimum distributions kick in can help reduce the amount you must withdraw in later years, reducing those tax obligations, said Moisand.

“There’s that golden era between 59 1/2 and 70 1/2, where you have the most control over your taxes,” he said. You won’t be hit with any early withdrawal penalties, but don’t yet have to take RMDs. That can be the ideal time for big moves, like a Roth conversion, if you hadn’t already done one, he said. You’ll pay the tax on the conversion in a low-income year in exchange for tax-free distributions later.

Ideally, start thinking about the spending side well ahead of retirement by making sure you have a good mix of accounts with different tax implications, said Marcy Keckler, vice president of financial advice strategy for Ameriprise. Think retirement accounts where distributions are taxable, and Roth options where they aren’t, as well as non-retirement options, such as brokerage accounts and health savings accounts.

“The sooner you start, the more flexibility you can give yourself,” she said.

To Your Successful Retirement!

Michael Ginsberg, JD, CFP®


Are Retirement Calculators Accurate? Financial Gurus Don’t Think So

By Brian O’Connell, March 6, 2016 TheStreet.com

U.S. workers saving for the long-term understandably rely on retirement calculators to benchmark their progress and to create a blueprint of how they need to operate to meet their outstretched financial goals. But some financial seers doubt the accuracy of these retirement calculators and view them as dangerous in the way they falsely inspire confidence in the average retirement saver.

A recent Texas Tech study on retirement planning tools, takes a close look at 36 financial calculators and states “in most cases, the available offerings are extremely misleading.” While the calculators studied claimed users had a 70% chance or better odds of reaching their retirement goals, researchers say the figure is closer to 53% — a significant reduction on likely retirement assets.

“The lack of consistency in inputs and default settings make these tools questionable for planning and educational purposes for households, financial professionals, and academics alike,” the study concludes. Pull the lens back, and the real issue with retirement calculator critics is users not getting reliable data, but using that unreliable data to make big investment decisions.

“As there are apparently many retirement planning tools available — many from well-known personal finance sites and or financial services providers — the real issue is accuracy,” explains Carla Dearing, CEO of SUM180, a Louisville, Ky.-based online financial planning service designed specifically for women. “In an industry so governed by regulators’ standards and rules, it’s surprising there is not a set of standards for what variables to include in a retirement calculation.” Perhaps surprisingly, there is no shortage of investment industry insiders who agree, and are highly critical of retirement planning calculators.

“Most calculators are, indeed, rubbish,” says James Carlson, chief investment officer at Charleston, S.C.-based Questis, Inc., a software company currently engaged in building its own retirement planning calculator. The problem, Carlson states, is that most tools only focus on a one-part equation, which is accumulating a nest egg of assets by some future retirement date. ”While many do properly simulate a wide variety of outcomes using Monte Carlo analysis, the best of breed calculators do not stop with computing a nest egg number,” he says. “Only a handful of calculators are incorporating the latest asset management concepts.”

Others say retirement calculators have some value, but are no substitute for a more thorough, carefully-crafted long-term savings plan. “Retirement calculators are a good start in looking at your retirement picture but not enough to build your lifetime goals and financial plan,” says Michael Sander, vice president at The Creative Planners Group, Ltd., in Tarrytown, N.Y. “A retirement calculator is too simple and does not take into account many items such as inflation, health costs, and many other key issues,” Sander states.

“As for their accuracy, I’d have to say ‘no’,” he adds. “Planning for retirement requires the use of two things — a financial advisor with vast experience of using financial planning software, and actual financial planning software, like MoneyGuidePro, which includes everything that one will face in their financial life.” Fair enough, but few financial experts say consumers will stop using retirement calculators. So what embedded features should they look for to gain maximum advantage from retirement calculators?

“There are a few components that better online retirement calculators should have,” says Ben Birken, a financial advisor with Woodward Financial Advisors, in Chapel Hill, N.C.. “The best one should include questions about health and lifestyle, in order to come up with a more realistic life expectancy than just using averages. Additionally, they should include the ability to factor in different types of accounts — e.g., after-tax, tax deferred and tax free — to better model tax consequences of withdrawals, rather than just lumping everything together.” ”For married people, a good calculator should also have the ability to maximize Social Security claiming strategies, and posses forward looking return assumptions that are reasonable,” Birken notes.

The consensus gleaned from talking to finance experts is not to stop using retirement calculators altogether (at the very least, they get you thinking about long-term planning, which is a big positive.) The main takeaway is to adopt a “buyer beware” attitude and understand the limitations that come part and parcel with such tools. And leave the real retirement planning to the human element – - specifically, you and your financial advisor.

To Your Successful Retirement!

Michael Ginsberg, JD, CFP® 


Early Retirement Is Just a Pipe Dream for Most

By Chris Metinko, Street.com March 5, 2016

Sue diRosario does not see a way she’ll retire. At this point, she’s just looking forward to a time she doesn’t have to work a full work week. “I do look forward to the day I may be able to work three days a week,” said the 60-year-old Maine resident. “I do not see a way to pay off the mountains of medical debt and loans I have…”

But diRosario is just one of many who feel lost when it comes to retirement, according to a new survey by HSBC. The study shows while 65% of pre-retirees 45 years old and older would like to retire within the next five years, about 38% say they are unable to do so. Additionally, 18% believe they will never be able to fully retire fully — almost double the percentage from last year that said they expected never to be able to afford to fully retire.

“Retiring at 60 is a pipe dream for virtually all Americans, except for the relatively few who are independently wealthy or will receive significant pension payments,” said Len Hayduchok, president of Dedicated Senior Advisors in New Jersey. “As fewer Americans are retiring with pensions and as more pensions that are still in place are become increasingly underfunded, early retirement or retirement even at the traditional 65-year benchmark will become increasingly more elusive,” Hayduchok added.

He said Americans need to be prepared for just the opposite of retiring earlier and instead think of retiring five years later. Americans retiring in their 70s, and in another generation 75, will very possibly be the new 65, Hayduchok said. For those that value retirement, they need to drastically cut back expenditures and save at least 20% of their paycheck, and remember the best strategy is always a combination of guaranteed income — such as Social Security, pensions and income — and growth strategies — such as stock investments with a time horizon ten years longer, he added.

Kevin Reardon, a planner at Shakespeare Wealth Management in Wisconsin, said retiring before 60 is possible, but one needs to be disciplined. “If you’re committed to retiring at 60, it is easier to reduce consumption now in exchange for more leisure later in life,” Reardon said. “If you can’t acknowledge that reality and are unwilling to make sacrifices now, then an early retirement goal is unrealistic.”

Reardon said for clients younger than age 50, it’s recommend a savings rate of 20% and for those between 50 and 60 years of age, a savings rate usually should be about 15%. “A higher savings rate has two benefits,” Reardon added. “The obvious benefit is you’ll have more assets later in life to spend and live on. The hidden benefit is that you’ll be accustomed to a reduced lifestyle during your working years so when you retire you have a lesser need.”

Reardon said while everyone is different as far as where they should put their money, most people need to strive for strong investment returns to make an early retirement possible.  He said in that instance, one needs a portfolio that tilts heavily towards equity. “Use disciplines such as dollar cost averaging and account rebalancing to moderate risk,” he said. “Be sure to downshift your risk three years prior to retirement and three years into retirement as this is the period in life you can least afford to suffer a large loss.”

One thing not to do is try to make up for too much lost time too quickly, said Scott Stratton, president of Good Life Wealth Management in Dallas. “For investors who are under saved, they often hope that their investment selection will help them retire earlier,” Stratton said. “Some think that if they are more aggressive — invest in last year’s hottest fund, day trade, or take an options class — that this will be their ticket to growing their portfolio quickly.”

Stratton said this usually brings disastrous results. “Instead, stick with a diversified asset allocation using high quality ETFs or mutual funds, “ he said. “The investment horizon you need to consider is not five years to retirement, but the 30 or 40 years that you need this money to last.”

To Your Successful Retirement!

Michael Ginsberg, JD, CFP® 


Will Student Loans Debt Destroy Your Retirement?

Fool.com, March 6, 2016

We all hear a lot about the student debt crisis. The fact that college graduates have amassed a collective $1.2 trillion in loans is nothing short of ludicrous.

When you think of those affected by student debt, you probably picture recent grads in their early 20s, struggling to make their monthly loan payments on their skimpy entry-level salaries. But student debt isn’t limited to those fresh out of college, or even those a decade or two into the workforce with loans still looming. Many of the people who owe big money on their loans are soon-to-be retirees.

In recent years, the amount of student debt carried by retirees and pre-retirees has skyrocketed. Back in 1989, pre-retirees with debt carried an average of just $600 in student loans apiece, but by 2013, that average grew to almost $8,000. Meanwhile, retirees with debt carried an average of just $400 in student loans in 1989, but in 2013, that figure reached a frightening $2,300.

As of 2013, the 65-and-older crowd is on the hook for approximately $18.2 billion in student loans, and about 706,000 senior citizen households are still carrying some amount of student debt. And while student loan balances have increased significantly among borrowers of all ages in the past 10 years, the fastest growth has been seen among borrowers aged 60 or older.

So where is all that added debt coming from, and what can aging Americans do to avoid it?

Who’s that loan for, anyway?

Taking out loans to finance your own education is one thing, but taking on debt near retirement to help a child or grandchild is a totally different ballgame. While most seniors with student debt took out loans for their own educational purposes, according to the U.S. Government Accountability Office, approximately 18% of federal educational debt held by seniors stems from Parent PLUS loans taken out for children or grandchildren.

Of course, it’s noble to help a child or grandchild avoid debt. However, while it might make sense to take on loans to further your own education, saddling yourself with debt on behalf of a much younger person is not such a wise move.

For one thing, someone who’s two to four decades your junior has a lot more time to pay off those loans before retirement than you do. Once you leave the workforce, you’ll be limited to a fixed income, and a monthly loan payment won’t work wonders for your budget. Additionally, your salary is more likely to remain stagnant in the years leading up to retirement, whereas a 20-something college graduate has many years to build a career with steadily increasing earnings.

 Keep those loans to a minimum

If you’re taking on student debt later in life to cover the costs of your own education, then it might pay off if the resulting salary boost more than makes up for the cost. But before you sign those loan documents, make sure the numbers really add up. If you’re looking at a monthly loan payment of $500 but only expect your salary to go up by $5,000 a year, then you’ll lose money by furthering your education. On the other hand, if a $500 monthly loan payment for three years results in a $25,000 salary boost upon obtaining your degree, and you have enough working years ahead of you to repay that loan and then some, then taking on debt makes more financial sense.

Of course, you can still do your part to keep your education costs to a minimum. If you’re going back to school later in life, skip the fancy private college, which, for the 2015-2016 school year, will probably cost you about $30,000-plus in tuition. Instead consider a local community college, where you’ll pay about a tenth of that. Even a public four-year in-state school is a bargain compared to a private college. In-state students pay an average of $9,400; cross state lines, however, and you’re looking at an average of $24,000.

 Save for retirement first

A recent study by the U.S. Government Accountability Office found that about half of households with members aged 55 and older have no retirement savings whatsoever. If you’re one of them, then you’re better off steering clear of student debt altogether and focusing on saving for retirement instead. Even if you’ve been contributing to your IRA or 401(k) for years, if you’re within a decade of retirement and that balance isn’t where it should be, it’s more important to build your nest egg than to worry about making loan payments during the last 10 years of your career.

Besides, if you have any money to spare as you near the end of your working years, putting it into a retirement account will go a long way. Over a five-year period, adding $400 a month to your 401(k) or IRA will result in an extra $24,000 for retirement, assuming a modest annual return of 6%. Remember, too, that if you’re 50 or older, you’re entitled to make tax-free catch-up contributions to your retirement accounts. You can put an extra $6,000 into your 401(k) and an additional $1,000 into your IRA, which is a much better use of that money than earmarking it to cover loan payments.

As a retiree or soon-to-be retiree, the last thing you want is to become a gray-haired poster child for student debt. At a time in your life when you deserve to be looking forward to retirement, you don’t need the added pressure of student loan payments dragging you down — especially if they’re for somebody else.

To Your Successful Retirement!

Michael Ginsberg, JD, CFP®