07/31/17

Here’s How Much a Job Loss Now Will Cost You by Retirement

By Dan Kadlec, June 19, 2017, Money.com

When Americans struggle financially—if they face a job loss or a bout with illness, for example—one of the first places they turn for relief is their retirement savings accounts. This makes some sense, at least in the short term: Such accounts typically provide ready cash. But the long-term costs are significant, and they plague more people than you might imagine.

Incredibly, 96% of Americans experience four or more “income shocks”—defined as a 10% or greater decline in pay, as the result of something like a job change, job loss, or ill health—in their working years, according to a study led by Teresa Ghilarducci at The New School for Social Research. Taken alone, minor income shocks don’t necessarily have devastating consequences for retirement savings, according to the study, which was also supported by the National Endowment for Financial Education. One 10% setback typically results in as little as $1,166 less savings at retirement. By comparison, having less-than-excellent health ultimately reduces retirement savings by up to $34,500, the study finds—and poor health reduces a nest egg by up to $86,300, on average.

But repeated shocks, as widely experienced in the modern economy, add up: Four 10% income dips in a career may result in more than $10,000 in reduced savings, the study finds. Researchers also looked at more severe shocks, in which an individual lost all income for at least a year. This also is more common than you might believe, especially over a long time frame: Some 61% of workers went at least one year by age 70 with no income. A quarter suffered through at least four such episodes, according to the research.

In these cases, retirement savings would be reduced by an average $6,218 per episode—or nearly $25,000 after four no-income years. These are just averages, and if they seem low that’s because many people are able to leave their savings untouched—and even continue saving—through any work-related hiccups. Affluent people experience little impact on retirement savings, typically because they have other assets to draw from. Income shocks are also less of a nest-egg problem for people with an emergency fund.

Two-earner households weather income shocks better as well. In some cases, a couple may even choose the drop in income–with one partner leaving a job to, say, care for kids or an aging parent. But low-income households, and those with few additional liquid assets, feel the bite. These are the families most likely to raid a 401(k) plan or other retirement savings for day-to-day expenses. Economic shocks explain at least 32% of early withdrawals by workers in low-income households, according to the study.

The researchers take issue with the argument that the retirement savings crisis is a result of Americans lacking saving discipline. The bigger problem, they conclude, is regular and largely unavoidable income disruptions, coupled with a retirement system that allows many to raid their long-term savings. “Under a retirement savings system that requires a lifetime of consistent and voluntary contributions, life gets in the way,” says Ghilarducci. “People suffer economic shocks such as job loss and protect their standard of living by decreasing or halting their retirement contributions. Only those with the most resources weather these storms with their retirement nest eggs intact.”

To Your Successful Retirement!

Michael Ginsberg, JD, CFP® 

07/24/17

The Big Mistake Most People Make When Planning For Retirement

By Shelley Seale, June 22, 2017, TheWeek.com

Preparing for your “golden years” is a big focus of any financial plan. Will you invest in real estate and the stock market to save? Do you have an IRA or company retirement plan? These are all great questions. But making sure you’re covered financially is only one part of the bigger picture. The question that is often overlooked when planning for retirement is how, exactly, you want your life to look after you retire. As in: What do you want to do with your time?

Retirement planning isn’t just about the money, but is equally about the significant life changes you will face. “People come into our office wanting to retire and they are clear what they want to retire from: a job, a career, a bad commute, the rat race,” explains Cass Grange, a senior adviser associate at Lucien, Stirling & Gray Advisory Group in Austin, Texas. “What they often lack is a vision of what they want to retire to: a meaningful life filled with connections and purpose. This takes time to build and plan. And planning your life after working is just as crucial as the financial piece of retirement planning.”

The important thing, when looking down the road to retirement, is to get specific. What’s important to you? What do you want an average day to look like? Where do you want to be? Those are some big questions to be asking now, especially if you’re decades away from leaving the workforce. But Grange has found that people tend to view their own ages differently through time. Before 50, they tend to think of themselves as being 12-15 years younger than they actually are, which can lead to unrealistic timelines for planning and saving.

“They often tell me, ‘I’ll just work until I am 80. That is my retirement plan!’” she says. Then in their 50s they get tired or downsized, or have health issues, and they come in and say, “I’m done working, I want to retire.” In other words, retirement — or the urge to retire — can sneak up on you. The sooner you start planning as if you’re retiring tomorrow, the sooner you can retire tomorrow, and the better that retirement will be. Start by making a list of the things you’d like to do.

Here’s a good example: Jessica and Bill (whose names have been changed for this article) were in their 50s and both working full-time. They had saved a significant amount of money already, and owned four rental properties. Their sole focus, for many years, had been on saving and surviving. But they hadn’t really thought about what retirement would actually look like for them. After some long, soul-searching conversations with Grange, Jessica and Bill finally put their retirement dream into words: They had always wanted to have a little cabin on a lake.

After hearing this, Grange urged the couple to hone in on how exactly this would work. The clients protested. “But we were going to wait until we retire to do this,” they said. But Grange was adamant. Why should they wait another 20 years to iron out the details of their dream, when they could do it now?

“I asked if they had any idea where they’d like to do this,” says Grange. The family had rented a cabin on the same lake in northern Minnesota for decades. They knew exactly which lake they wanted to be on, and how much it would cost. In fact, the couple had enough money to buy the cabin now. They bought a cabin that summer and have enjoyed it most summer weekends since then.

As Jessica and Bill did, decide where you want to be. If your dream is to live in the mountains, pick a city and start looking at property prices, so you know what you’re getting yourself into. The worst thing that could happen is to realize at 65 that you can’t afford to chase your retirement dream.

The other reason to get specific is because sometimes people spend years dreaming of retirement, but once they get there, they’re confused or unsure of how to spend their time. After decades of doing the same job, this much free time can lead to loneliness or a loss of a sense of purpose — especially because so many people take not just money from their jobs, but meaning as well.

If you enjoy what you do, try looking for a charity or nonprofit you can volunteer for in retirement. Don’t just say you want to volunteer, actually find the right program for you. A person’s network of friends and family makes a huge difference in the success of retirement, Grange says. Even if you’ve started planning late in the game, it’s never too late to take purposeful steps.

To Your Successful Retirement!

Michael Ginsberg, JD, CFP®

07/17/17

Pre-retirees Unsure About Executing Retirement Income Strategies

By Javier Simon, June 22, 2017, Plan Sponsor

According to a survey by the American College of Financial Services, 74% of respondents failed a 12-question retirement income quiz. Unlike their younger counterparts, individuals nearing or in retirement don’t have the luxury of long time horizons in which to grow their nest eggs. They are at a point where developing a strategy to sustain their assets and draw retirement income is critical. However, many lack the knowledge to do so effectively. Of those who passed, only 5% scored a “B” (80%) or higher.

In particular, several respondents failed to correctly answer questions around preserving assets and sustaining income in retirement. The survey found only 38% know that $4,000 is the most they can afford to “safely” withdraw per year from a $100,000 retirement account, and only 34% know that a substantial negative investment return at retirement age is more damaging to portfolio sustainability than the same negative return a number of years before or after retirement.

The study also indicates most respondents lack knowledge of best practices to execute near retirement. Only 33% understand the benefits of working two years longer or deferring Social Security for two years as opposed to increasing contributions by 3% for five years just prior to retirement. Moreover, fewer than half know that using a portion of their portfolios to purchase a life annuity can protect against longevity risk. In fact, the lack of knowledge behind annuities was of particular concern to researchers. Rating scores on sections from best to worst, “annuity products in retirement” took the top followed by “company retirement plans” and “paying for long-term care expenses.”

According to the survey, only 29% know that buying an annuity product will be less expensive for an older person than a younger one; only 17% know the lifetime income payout rate for a 65-year-old male is roughly in the 6% to 7% range; and only 14% know a deferred annuity with a guaranteed lifetime withdrawal benefit can pay income even if the investment drops to zero.

However, 74% say having a source of guaranteed lifetime income in retirement is important. Furthermore, the research highlighted several areas for which older Americans scored very well. Subjects marked by high proficiency include housing finances, Medicare issues, the principle of inflation, the role taxes play in retirement, and life insurance concepts.

Next: Demographics Play Key Roles in Literacy

The survey found major gaps in score levels along the lines of gender, asset amounts, and education levels. More men (35%) passed the quiz than women (18%). More than half (82%) of women failed the quiz, suggesting the need for targeted communication and education based on particular concerns that may be more common among females.

Not surprisingly, higher passing levels seemed to correlate more closely with those who had substantial assets. For example, 49% of those with at least $1 million in assets passed the quiz, as opposed to 20% who passed with less than $1 million in assets. Of those who passed, 40% had at most a graduate degree, 32% had at most a college degree, and only 9% never graduated college.

Surprisingly, the study found that more people who weren’t working with financial advisers passed than those who were working with advisers. Thirty-four percent of people without advisers passed, and only 22% of those working with advisers did as well.However, the study also shed light on what people value in advisers. Of respondents with an adviser, 52% stated it was extremely important for their adviser to act as a fiduciary. Moreover, 76% of respondents with advisers found it extremely important that their adviser educate them on retirement risks.

Moving forward, it’s imperative that advisers educate clients about these risks, focus on areas of low proficiency, and re-enhance dimensions of high proficiency. A thorough evaluation of a client’s financial literacy can also help, as 61% of respondents reported they were very or extremely knowledgeable about retirement income planning; however, only 33% of them passed the literacy quiz—with a mean score of 51.87%.

The 2017 RICP Retirement Income Literacy Survey Report can be found at Retirement.TheAmericanCollege.edu.

To Your Successful Retirement!

Michael Ginsberg, JD, CFP® 

07/10/17

Retirement is a Journey, Not a Destination

By David Adams, June 23, 2017, Financial IQ.com

As advisors, we’re trained to help clients set some magic number for how much they need to save by age 65. Then they can retire, start taking Social Security and live off their investments. Only then can they start to travel and live life. But after 15 years of working as an advisor, I had an experience with my father that led me to change my entire perspective on retirement.

My father was an example of the typical retirement pattern. He worked in retail for 40 years. In his 60s he was still working 80 hours a week. One day while moving boxes around at work he fell and hurt himself. The injury wasn’t serious but I became concerned about his health. I told him he needed to slow down or retire but he kept telling me he needed to keep working to a certain age to be sure he had the money he needed to retire.

Six months later he was rushed to the emergency room because it appeared he was having a stroke. Thankfully it turned out to be high blood pressure instead. Once again, he insisted he needed to go back to work. I went to see him and begged him to quit, saying, “Dad, I’m not losing you to retail.” But he kept insisting he couldn’t leave his job because he didn’t have enough money to retire. I told him, “You can always have more money, but if you wait another two years to retire you may not be healthy enough to enjoy it.” We went back and forth like this for several days until finally he agreed to quit.

Like my father, many of my clients approach retirement from a place of fear. I tell these clients that financial planning is important, but it’s equally important to find a balance where you enjoy life along the way. They need to make retirement a journey and not just a destination.

For example, I have a client with about $1.8 million in his retirement account who was wearing himself out working awful hours. He had been telling me he wanted to quit for years but kept insisting that he couldn’t. We talked about potential solutions, such as taking a pay cut or getting a lower-pressure job that would cover the bills and still allow him to spend more time with his wife. But he was always too afraid to pull the trigger — until his wife got really sick. That was a wake-up call for him.

He finally did make the transition away from his high-stress job and today he’s very excited. He’s going to take on some consulting work and make about a third as much as he was before he quit. But he’s let go of the idea that he needed to save $2.5 million before he retired.

When clients insist they need to keep working to save a little bit more money before they retire, I tell them there’s never going to be enough to make them feel fully secure. They’re never going to feel totally comfortable, no matter how much is in their accounts, if they approach saving for retirement from a place of fear.

I encourage them to change their thinking about retirement and stop thinking about it as a static dollar amount or age deadline, but rather as a dynamic process. Going through this very same experience with my own father taught me how important it is to support clients in finding ways to live life now so they can think of retirement in a more balanced way.

To Your Successful Retirement!

Michael Ginsberg, JD, CFP®