Confusion Reigns On Retirement Spending Strategies

By Kelley Holland, April 28, 2016, CNBC

Saving for retirement is hard enough these days, with wage growth lagging and more than 40 percent of workers lacking access to a workplace retirement savings plan.

What’s even harder is figuring out how to draw down those savings when the time comes. Three in 4 respondents to a survey did not know how much they can safely withdraw from savings every year, according to an Ipsos survey for New York Life. Almost a third think they can safely take out 10 percent or more, even though the Social Security Administration estimates that a man turning 65 today will live to age 84. A woman can expect to reach age 86.

“Baby boomers haven’t done a great job saving for retirement,” said Chris Blunt, president of the investments group at New York Life. “If they now screw up the decumulation phase, we are going to take a bad situation and make it worse.”

The survey of 810 people was conducted in late March. It was limited to people age 40 and older with incomes and assets of at least $100,000 — a segment of the population that should be relatively well informed on financial matters, Blunt said.

Yet they were not. For example, 9 percent thought it would be all right to withdraw 15 to 24 percent of their savings annually. Even with positive investment performance, that would almost certainly deplete a nest egg within a decade.

The widespread confusion about how and when to draw down retirement savings could be especially hazardous to many older Americans because millions are facing retirement with little in the way of guaranteed income.

Social Security is available to almost everyone, but the average monthly check for retired workers is just $1,341. And while a number of workers retiring today can still also depend on income from a defined benefit pension plan, those traditional pensions are fast disappearing. Some 73 percent of the 102 plans in a 2015 survey by NEPC, a consulting firm, were either closed or frozen, up from 64 percent.

Part of the confusion around withdrawing savings is that there is no strong consensus on the optimal strategy. Retirement experts long recommended that people draw down savings at a rate of 4 percent a year, but years of low interest rates have made that approach questionable.

The optimal rate for withdrawals also depends on how large the savings are relative to the income a retiree needs, and how they are invested. Historically, portfolios with more stocks than fixed income have outperformed those invested more conservatively, but not all retirees have the stomach for stocks later in life.

Some experts now advise adjusting your drawdown rate based on how the stock market is performing. When stocks have a bad year, the experts advise that you withdraw less and leave more of your money in savings to benefit from the eventual upturn. In good years, you can withdraw more.

Another challenge is that financial advisors generally are less informed on drawdown strategies than they are on accumulating savings, Blunt said. “The vast majority of financial advisors are in their 40s and 50s, or early 60s, and they have been trained on asset accumulation,” he said. “This whole field of retirement income has come about in a big way probably in the last 10 or 15 years.” One of the most popular professional designations advisors are currently earning is that of Retirement Income Certified Professional, he said.

With a new field comes new financial products, of course, and insurers like New York Life and others have rolled out different kinds of annuities in the past few years. Blunt said many have been selling very well. If you steer clear of contracts with overly high fees, annuities can be one way to guarantee some income in later life. But when it comes to a basic understanding of how and when to use retirement savings, most people are coming up short.

To Your Successful Retirement!

Michael Ginsberg, JD, CFP® 


5 Facts to Know About Your 401(k)

By Debbie Carlson, US News and World Report, April 28, 2016

The way most Americans will fund their retirement is through an employer-sponsored 401(k) plan since few private-sector employers offer pensions. ”About 25 to 30 percent of people’s (retirement) income is coming from a 401(k) source. It’s a pretty important thing to have in place,” says John Falk, division consulting manager with U.S. Bancorp Investments in Milwaukee.

Plan offerings differ from employer to employer, but the basic way the plans operate are similar. Given how vital these plans are for retirement, participants should know a few facts about them.

Enrollment might be automatic.

Hattie Greenan, research director of the Chicago-based Plan Sponsor Council of America, says 52.4 percent of 401(k) plans offer automatic enrollment. Without the automatic enrollment, the Department of Labor says approximately 30 percent of eligible workers don’t participate in their employer’s 401(k)-type plan.

Justin Goldstein, director of wealth management at Bronfman E.L. Rothschild in Madison, Wisconsin, says automatic enrollment has helped to cut some of the barriers people have enrolling in these plans. ”The automatic feature turns inertia or procrastination into an ally in saving for retirement,” he says. Employees can opt-out of the auto-enrolled 401(k) plan, but that quit rate is 5.5 percent, Greenan says.

Generally, auto-enrollment plans will put in between 3 and 6 percent of an employee’s salary, although the type of allocations will vary. Steve McCaffrey, board chairman at Plan Sponsor Council of America and senior counsel at New York-based National Grid, says their automatic enrollment puts employees in a target-date fund as a default.

Target-date funds have a mix of bonds and stocks. The asset allocation between the stocks and bonds are determined by the employee’s age. The closer the person is to 65, the more bonds are in the mix to make the portfolio less prone to market swings. ”Target-date funds are a good investment for people who don’t know what to do, or don’t want to (set the allocation),” McCaffrey says.

Go beyond the employer match. Many employees will only put in enough money to get any company match, such as when a company matches 100 percent of an employee’s first 6 percent of contributions. Goldstein says some people mistakenly believe that’s all they need to save for a prosperous retirement. ”There are plenty of statistics out there that show you’ll need to save 10 to 15 percent of your own dollars to support the lifestyle you’ve grown accustomed to when you remove that work income,” he says.

Dean Hedeker, principal of Hedeker Wealth in Lincolnshire, Illinois, says because 401(k)s are pre-tax savings vehicles, the person’s overall tax burden reduced, and it has an impact in savings. ”Depending on your tax bracket, say you’re in the 30 percent bracket, for every $1,000 you put in, it only costs $700,” he says.

Fill out the beneficiary form and keep it updated.

People enrolled in a 401(k) plan need to name a beneficiary in case of their death, McCaffrey says. If there is no beneficiary named, the assets will default to the person’s estate. Hedeker says people should also periodically review who is listed as beneficiaries in case life circumstances have changed. “If you get a divorce and the ex-spouse is listed at the beneficiary and you die, who gets the money? Your ex- does,” he says.

Also, if people remarry, under federal law their spouse is the automatic beneficiary, unless they name someone else. “If you have kids from a previous marriage, have a 401(k) and you die without a beneficiary, the spouse gets the money and the kids are cut out,” he says.

Be careful when taking out a loan.

Loans from 401(k)s are allowed and can be a short-term option for some people, but they can be problematic, says Marc V. McDowell, director of retirement plan services at Bronfman E.L. Rothschild in Madison, Wisconsin.

“The rates can be appealing and you do pay interest back to yourself. But that’s where the benefits end. Now that money is out of the market; it’s not growing or compounding,” he says. McCaffrey also says if the loan isn’t put back in the 401(k), the person needs to pay taxes on it and perhaps a penalty for early withdrawal. Loans can be paid back via payroll deductions.

Working longer has its advantages. While some workers dream of an early retirement, others will work past the traditional retirement age of 65. And, they will be allowed to continue to contribute to their 401(k). Additionally, if they are working past age 70.5, they won’t be forced to take required minimum distributions from the 401(k), which they must do with individual retirement accounts or other retirement savings vehicles.

Falk says he’s seeing more people thinking about working later in life, so this benefit can be worked into their retirement income and may reduce their tax burden. ”The low interest rate environment is not kicking out the interest income, so many will need to do some work in retirement to not take a step back in their lifestyle,” he says. “You would only be required to take distributions once you physically retire from that plan.”

To Your Successful Retirement!

Michael Ginsberg, JD, CFP®



By Jill Hoffman, April 27, 2016, Financial Services Roundtable

The other day, I read an article by an acclaimed writer who boldly admitted his private humiliation: he’s one of 47% of Americans the Fed reports would have trouble coming up with $400 to pay for an emergency. The article, “The Secret Shame of Middle-Class Americans” describes his personal financial struggles to keep up an image of prosperity, while quietly stressing about paying the bills.

Admittedly, shock was not my first reaction to his piece. Perhaps because I, like so many Americans, know what it means to live in fear of the next shoe dropping and being unable to pay the bills. As I have discussed with many friends who have experienced this challenge, we know broke. And frankly, if you don’t know broke, you have no idea.

I’m fortunate that those years are behind me, but I can relate to the extreme toll that it takes on a person and a family. After all, when you do the right things such as work hard, give back to others, and play by the rules, that should mean that you are successful. Too often, the fact is that does not equate to meeting the bills and getting ahead. That can make a person, well, angry.

It’s clear from the Presidential race that angry Americans are showing up in force to vote like never before. Not just angry Republicans, but angry Democrats. While they have different ideas about how to fix the nation’s woes, the common thread that they share is a sense of populism. They want to know that they have a chance to get ahead, and they want to know that their children and grandchildren will grow up in a world full of opportunity.

Critically important to achieving financial security is long-term savings and investment, which often leads to the subject of retirement planning. After all, that’s what we all look forward to, right? The day we can turn in our running shoes from the rat race. That’s the dream, at least for many.

I talk a lot about the need for individuals to plan early for retirement, and that they need access to financial assistance along the way. Americans aren’t saving enough for today, let alone the future. At the Financial Services Roundtable, we polled the public to ask their views, and 68% said the Presidential candidates do not talk enough about how to address retirement security.

According to a story recently published in Time, aging and retirement security is one of the megatrends facing the world, not just the United States. In America, retirement challenges are not just a problem for our older citizens, but it’s a challenge that spans generations. It’s a problem for the millennial who is saddled with student debt and can’t start saving early to take advantage of compound interest over time. It’s a problem for the sandwich generation who is strapped simultaneously with childcare expenses, housing, healthcare, college savings, eldercare, and their retirement savings. It’s also a challenge for Baby Boomers who are underprepared for their golden years and need to figure out how to make ends meet.

At FSR, we promote Save10 and acknowledge employers who help their employees save at least 10% for retirement. We encourage auto-enrolling employees in a retirement plan because we know it results in better savings. These are positive steps, but we must also address whether employers are in a position to help their employees save. We must take a look at the barriers to savings and investment that are driving the economic insecurity facing so many Americans. We’re ready to have that serious conversation. This trend is not going away, and we need our candidates to make it a priority.

 To Your Successful Retirement!

Michael Ginsberg, JD, CFP® 


How Americans Blow $1.7 Trillion in Retirement Savings

By Ben Steverman,  April 27, 2016 Bloomberg

Economists discover we’re pretty shortsighted, and it’s costing us…You’re traveling across the desert, feeling parched and looking dirty. You take a long drink of water from your canteen, then wash your face with the rest. As you’ll discover before you die of thirst in a day or two, you just made a huge mistake. Outside of cartoons, nobody is this stupid. But people make the same kind of mistake all the time, putting their current happiness (vacations, flat screens, new cars) way above their future well-being. 

Economists call this kind of irrationality “present bias.” And according to a National Bureau of Economic Research study, it and other biases are holding back millions of Americans from saving enough money for that ultimate future need: retirement.

How much money? Try $1.7 trillion on for size. That’s 12 percent of the $14 trillion in U.S. individual retirement and 401(k) accounts. Another error economists worry about is “exponential-growth bias.” This is the failure to realize how savings compound over time. Save $100 at a 7 percent rate of return, and you’ll have only an extra $7 next year. But the gains compound year after year. In 10 years, your investment will nearly double and be growing at $14 a year. In another 10 years, it will almost double again and be yielding $27 a year.

Some people have a hard time wrapping their heads around this concept. They think of money as growing in a linear way, by more or less the same amount each year. And that makes saving and investing seem much less attractive than the trip to Cancun or the 40-inch television.

The researchers looked at survey data to try to figure out how many people are afflicted by more serious versions of these two biases. To find their “exponential-growth bias,” people were asked to predict how much an asset would increase over time. About seven in 10 underestimated its growth.

To test their “present bias,” respondents were asked such questions as: “Would you rather receive $100 today or $120 in 12 months?” For those not interested in waiting, the survey raised the stakes: What about $130 in 12 months? After analyzing the answers, researchers classified 55 percent of people as “present biased” on money matters.

What do a bunch of math problems and hypothetical questions have to do with the real world? The study, which appears in the NBER’s Bulletin on Aging & Health this week, found there was a strong relationship between respondents’ biases and their retirement account balances. The more biased they were, the less they’d saved in a 401(k) or other account. The connection held up even after researchers controlled for income, education, intelligence, and financial literacy.

If somehow you could eliminate these two biases, retirement savings would immediately jump 12 percent. Of course, it’s not easy to wipe away irrational behavior. (We’ve all streamed another Netflix episode rather than go to sleep, knowing full well we’d regret it in the morning.) It may help, however, simply to be aware of your own shortcomings. The study tried to measure self-awareness and found a link to higher retirement savings.

In other words, if you know you’re prone to doing something stupid, you may be more likely to ask for help. Or sometimes you can essentially trick yourself into doing the right thing: For example, to combat present bias, you might agree to have your 401(k) contribution automatically increased not now but early next year—just as your annual raise (assuming you get one) goes into effect. Then you can rely on that other shortcoming many of us share: forgetfulness.

To Your Successful Retirement!

Michael Ginsberg, JD, CFP® 


Prince’s $250 Million Mistake

Posted by AICPA Communications on April 29, 2016

With songs like “Purple Rain” and “Little Red Corvette,” Prince wrote the soundtrack of a generation. However, his failure to write a will could spell trouble for his $250 million fortune.

Last week, people around the world mourned the death of this gifted singer and songwriter, and many were shocked to hear that Prince didn’t have a will or an estate plan in place. Even though he was a notoriously hands-on negotiator who meticulously controlled the intellectual property rights of his song collection, this unfortunate lack of planning has left uncertainty for Prince’s heirs. The future inheritance process could cost tens of millions of dollars in legal fees, and state and federal estate taxes. Surprisingly, he’s not the first famous person who left this world without a plan.

Not yet famous with a quarter billion dollar estate to leave loved ones? It’s still important to draft a will and keep it up-to-date based on changing personal and financial situations. Here are a few tips to make sure you have an effective will:

Seek out a pro: Seek out the assistance of a CPN or an attorney to draft a will and do estate planning. An attorney will be able to help you navigate a simple will and a CPA will be best positioned to help with more complicated estate planning. Having a professional prepare your will eliminates any confusion if you have minor children, own significant assets or want to control the management and distribution of your property. Additionally, you will know that all your intentions are clearly communicated and recorded.

Periodically review your documents: Year to year, relationships change, and, as all CPAs know, financial situations change. Regularly update your will to ensure your closest relationships are accurately reflected in the will.

Who will your executor be? Being an executor is a thankless job, but it is an extremely important one with many responsibilities. You’ll want to choose someone who is ready to take on tasks, such as taking care of any debts and distributing your property and money properly.

Make the time: For some people, the idea of taking heed of their finances is so daunting they put it off. However, it is important to make time to do so to ensure that your wealth is distributed how you wish in the event of misfortune. Work with a professional to either write a will or review your financial affairs, making sure your wills and estate plans are up-to-date. Failure to do so could have devastating financial consequences in the event of an unexpected death.

Don’t have a will or estate plan? Does yours need updating?

To Your Successful Retirement!

Michael Ginsberg, JD, CFP