Retirement Plan vs. Retirement Income Plan

One of the questions I am asked the most lately is “what is the difference between a retirement plan and a retirement income plan?”

In my practice, I define “retirement plan” as a strategy to accumulate the wealth needed to retire at a certain age, with a defined income goal.  I work with people to identify their projected budget at retirement, how much they need to start saving today, where they should be saving those dollars and then recommend the investments vehicles that could work with those saved dollars.

Often times, the dollars don’t match their goals.  By that I mean, they have lofty ambitions and either don’t have the money they will need to set aside each month to realistically achieve that goal or they have the money but they don’t want to stop spending today to free up that money for saving and investing.  So we work through more realistic scenarios to find a happy medium.  Once a plan of action is decided on, then we work through where and how to invest the savable dollars they are willing to commit to their retirement plan.  For this work I charge a fee of $600.

When someone is close to or at retirement, then we start talking retirement income plan.  I define “retirement income plan” as a strategy to turn one’s lifetime of savings into income that is meant to last their lifetime.  In fact, I wrote a guide with virtually the same title – see the right margin of this site for how to get a FREE, no obligation, electronic copy of that guide.  So now we are using a different set of tools and strategies to not just focus on growing ones assets, but preserving them and making sure one doesn’t run out of money.  This requires a specialized skill set which I have studied and honed for over 20 years.

After spending about 25 minutes or so with someone on the phone, we can usually determine if a retirement income plan is a good fit at that time.  If it is, I get started crunching numbers to see what they can realistically spend in retirement.  Determine if there are any income gaps.  Educate them on strategies to increase their retirement readiness.  Work to find out which Social Security claiming strategy would be a good fit for them.  Provide advice if retirement is not in the cards at their desired stage based on their goals and spending habits.  That entails solving for how much more they need to save, how much longer they may need to work or show them how much they can afford to spend from their assets and let them decide if they can make it work if they truly want to retire right away.  For this work I charge a fee of $600.

I wish I could say that every person that comes to me is ready to retire right away and start enjoying their Golden Years.  Thankfully, many come in before they quit their job or make other irrevocable decisions with things like a pension plan.  Sadly, some come in after they are done working and ask how I can make a small sum of money provide a large income and do it for 30 years.

There are many other things that go into setting up a retirement income plan – such as cash flow, debt management, how the estate should be handled should they pass away, how will very large bills like assisted living, in-home or nursing home care be handled, etc. But in summary, I break the retirement income plan into 3 parts. An income plan, a tax plan* and an investment plan.

So there you have it.  Hopefully now you know the difference between a retirement plan and a retirement income plan – at least as how I define them.

Separate from the financial plan and our role as financial planner, we may recommend the purchase of specific investment or insurance products or accounts.  These product recommendations are not part of the financial plan and you are under no obligation to follow them. 2486607/DOFU 08-2019

As We Head Towards Dow Jones 20,000 And Turn The Page On 2016…

Disclaimer:  I wrote this article in early January 2017, but this information should still provide value.

As we head towards Dow 20,000 and turn the page on 2016, now is the perfect time to map out your financial resolutions for the New Year and beyond.  Here are a few suggestions for making 2017 healthy, happy and successful:

  1. Create emergency savings

Life is full of unexpected emergencies, and having extra cash on hand can help keep a serious illness, home repair, or other sudden financial need from derailing your finances.  Prepare for unpredictable expenses by putting aside the equivalent of three to six months of expenditures.

  1. Make a monthly budget and stick to it

Budgets may sound like a lot of unnecessary work, especially if you’re financially comfortable.  But if you’re not tracking your spending, you may be surprised by how quickly it adds up – and which expenses are costing you the most.  As 2017 begins, set a budget and work on sticking to it for three months.  Track your performance and revise the budget, as needed.  Don’t aim for perfection, instead, try for incremental improvement.

  1. Save more for the future

Creating a disciplined savings strategy is an important way to stay on track for your retirement and other goals.  We recommend keeping separate “buckets” of savings for short- and long-term goals.

  1. Make retirement plan contributions regularly (instead of all at once)

Even if you’re diligently saving, you may be among the 71% of Americans who haven’t put aside enough money for retirement.  One key change you can make is to take advantage of “time in the market”.  Instead of waiting until the last minute to make your annual contributions, give your money more time to potentially grow by making automatic contributions to your account every month. (Source: Washington Post)

  1. Maximize your retirement-plan contributions

Tax-managed retirement accounts are one of the most powerful ways to save for a more comfortable retirement, because they allow you to control your tax liabilities today – while potentially accumulating assets for the future.  Make the most of these accounts by contributing as much as you can.

  1. Pay down high-interest debt

Did you know that 54% of Americans believe they will never pay off their debts?  Don’t let high interest debt keep you from getting ahead financially.  If you’re carrying a significant amount of debt, make paying it down a top priority. (Source: Associated Press)

  1. Create a powerful legacy for the world

We believe that a rich life involves more than financial success and a comfortable lifestyle.  Whether you want to leave something to your loved ones or support causes you care about, take time to address the legacy you’d like to leave.

  1. Review your estate planning and legal documents

Your core legal documents need regular reviews to ensure they keep up with any changes in your life.  If a few years have passed since you looked at your documents, dust them off and make sure that they still represent your wishes.

  1. Stay on top of your health

Healthcare is a major expense for most Americans, especially if serious illness strikes.  Take steps to protect your well-being by building a healthy lifestyle and prioritizing preventative care.

  1. Involve your children and grandchildren in your finances

Fostering financial wisdom is a powerful way to help your children and grandchildren build a solid, stable life – and help ensure you’re able to pass on your values and wealth in the future.  Rather than keeping your finances private from your loved ones, we recommend including them in conversations about your goals and priorities.

Think long-term, not short-term.  Recently, we’ve spoken to many clients who want to ride the post-election growth train.  Just as we’re here to help you from despairing when stocks tumble, we also want to help control the euphoria when markets rally.  This has been a narrow rally, and rallies don’t usually continue forever.  Impulsive choices can challenge your long-term objectives.  As always, it’s important to take the right amount of risk for your unique circumstances and stay focused on the long-term goals that we are pursuing together.

Have a Safe and Happy New Year!

 

2011373 /DOFU 02/2018

6 Key Questions Every Retiree SHOULD Answer

RETIREMENT: READY OR NOT

A Reality Check for Those Retired or Close To It

The clock is ticking. Baby boomers are getting within a 9 iron of their golden years. Most have finally come to grips with the fact that despite the ideal retirement pictured in glossy brochures and commercials — that retirement for most won’t be close to what they envisioned in their earlier years.

All the best laid plans, calculations and formulas have given way to one glaring reality: This is what I’ve set aside for my retirement. Now, how on earth can I make it last?

In other words, it is time for a reality check and a meaningful conversation about your retirement income strategy.

New research finds the magnitude of the retirement savings shortfall in America today is staggering. The U.S. Retirement Savings Deficits could be as high as $14 trillion*. The “American Dream” of retiring after a lifetime of work will be long delayed, if not impossible, for many.

Acting sooner rather than later can greatly improve your own retirement security.

*Source: The Retirement Savings Crisis: Is It Worse Than We Think? The National Institute on Retirement Security, June 20, 2013

Question 1:  Do you know how long your money will last if you stop working today, invest your nest egg as safely as possible and try to maintain your current standard of living?

One of the greatest fears of retirees today is running out of money before they run out of life. This is an important question to answer and lies at the heart of Retirement Income Preparation. These answers are even more critical given the difficulties in the financial markets and larger economy that have significantly impacted retirement savings over the last decade. While it would be nice to have a one-size-fits-all formula when it comes to how long your money will last, the truth is there are many factors that go into that equation.

Question 2:  Do you know which one of the 567 ways to claim your Social Security will maximize the lifetime benefits?

The Social Security Administration provides you with 567 ways to claim your benefits. The Social Security handbook has 2,728 separate rules governing your benefits, yet they provide ZERO employees to advise you on the best strategy. Choosing the right benefits at the right time could mean tens of thousands of additional dollars in retirement. Making a mistake COULD cost you up to 72% of your benefits. And it’s absolutely critical that you get it right because soon after you claim, your benefits become permanent. There are no Do Overs. Social Security is enormously complex. For a couple, age 62, there are over 100 million combinations of months for each of the two spouses to take benefits.

Source: 44 Social Security “Secrets” All Baby Boomers and Millions of Current Recipients Need to Know – Revised. By Laurence Kotlikoff, Forbes Magazine, July 3, 2012

Question 3:  Do you know the proper mix of stocks versus bonds in a retirement income portfolio?

Asset allocation is an investment strategy that attempts to balance risk versus reward by adjusting the percentage of each asset in an investment portfolio according to the investor’s risk tolerance, goals and investment time frame. Asset allocation is based on the principle that different assets perform differently in different market and economic conditions. One of the cornerstones of financial preparation for retirement is that an individual’s exposure to higher-risk assets like stocks should decline as his or her retirement date nears. Since risk level and portfolio return are directly related, your asset allocation should balance your need to take risk with your ability to withstand the ups and downs of the market.

Question 4:  Do you know how big of a nest egg you’ll need as you enter retirement if you’ll be retired for 20, 30 or even 40 years?

Have you ever considered how big of a nest egg you’ll need to retire comfortably if your retirement could last 20, 30 or even 40 years? The range of answers is all across the board. The low end suggests you’ll need to have saved 8 times your pre-retirement pay in order to maintain your current lifestyle during retirement, with the high end more like 20 times your annual salary. Estimating what your retirement expenses will be can give you a ballpark figure for the amount of savings you’ll need. It will be imperfect because it requires making assumptions about factors such as how long you will live, what the inflation rate will be and how your investments will perform. Nevertheless, making an estimate is a valuable exercise.

Question 5:  Do you know the appropriate spending rate from your nest egg to insure your savings last your lifetime?

If you thought it was hard to grow a nest egg, try living off one in retirement. A lot is written about how to build a nest egg, but not as much about taking money out. Most have no idea how dangerous it is to withdraw too much from their nest egg each year. As baby boomers make the transition from career to retirement, more and more people are grappling with the question, How much can I safely withdraw from my nest egg each year? In today’s low interest rate environment, that poses even bigger challenges. The presumed safe withdrawal rate of 4% has come under fire in recent years. What’s an investor to do?

The Wall Street Journal said a 2% withdrawal rate is bullet proof, 3% is considered safe, 4% is push­ing it, and with 5% or more, you risk running out of money, especially if you live into your 90s.

Source: The Wall Street Journal: How To Survive Retirement – Even If You’re Short On Savings

Question 6:  Do you know how the rising cost of health care could affect and even decimate your retirement income strategy?

It’s a fact that healthcare costs have increased at a record pace, and many believe they will continue to rise. Everyone knows the old saying about death and taxes. But there’s one more certainty everyone who retires will need to face: the staggering cost of healthcare. Most people don’t appreciate the significant impact healthcare costs can have on their retirement savings. Yet these expenses can overwhelm even the best-laid retirement strategy. Nearly 9 out of 10 are flying blind when it comes to understanding, what could be for many, one of your largest costs in retirement. If you’re like most, you’re underestimating these expenses. Many retirees are not prepared for the high-cost of medical care in retirement when they are no longer part of a company plan. And, too many people believe that Medicare covers most or all expenses. The reality is that Medicare only covers a percentage of your medical bills.

Source: Putnam Investments Lifetime Income Score in collaboration with Brightwork Partners LLC

We have 6 more questions that you should know and answer.  To get the next 6 Key Questions Every Retiree Should Answer, Click Here and get the Guide.  As a bonus, we also included in that guide 6 Steps you can take to get your retirement strategy on track or back on track!  The guide is a PDF file and you can save it or print it and start using it right away!!

Here is one more link to that guide:  Link to Guide

2003128/01-2018

Step 2 – Monthly Savings to Reach Retirement Goals

How much money do I need to save each month to reach that nest egg?

             I decided to stick to a 30 year time horizon and include the chart from my excel program that shows how much a person needs to save each month.  You will notice the bottom line is for those who already have savings set aside that we should account for.

Same thing as before, read the chart left to right.  First we look at how much monthly savings is available.  Then we look at how many years we have to save that money.  Lastly, we hope for some sort of rate of return on those savings. You will notice I picked a hypothetical 8% per year as the assumed rate of return over a 30 year period. Keep in mind that past performance is not indicative of future results.  Rates of return will fluctuate and your accumulation value may be higher or lower than those shown below.

How much do I need to save Chart

This is a hypothetical example for illustrative purposes only.  It is not indicative of any particular investment or guarantee of future performance.
These values assume that the currently assumed hypothetical elements will continue unchanged for all years shown. This is not likely to occur and actual results may be more or less favorable than those shown.  It does not take into account the reduction of potential fees and expenses.  If it did, results would be lower than those shown.

Hypothetically speaking, say you determined you needed about $2,000,000 to retire in 30 years.  If you look at the right side of the chart, find roughly where $2,000,000 is and then go back to the left side to see how much savings needs to be invested each month you will see its between $1250 and $1500 a month.  Keep in mind, if you do have an employer match, pension or feel you can count on social security, than that should be factored in.  Ignoring pensions and social security, you might have an employer that matches 50 cents on every dollar you put in your 401k.  So if you put in $1000 a month they would put in $500 a month.  If you are fortunate enough to have an employer with that generous of a 401k match then you have to come up with $1000 a month to put in and they will take care of the $500 and that alone will help get you on your way to your retirement goal in this example.

One nice benefit to using this step by step process is you already accounted for inflation in Step 1.  We decided on a hypothetical inflation rate and used that in our calculations to determine the total amount of money needed at retirement.  So the total sum of money we came up with had an assumed inflation rate factored in.  That helps us because when we go to the next chart, we only have to find the amount needed to save each month to get to that end result vs. having to find a dollar amount but then increase it each year by an assumed inflation rate.  So that means, in the above hypothetical example, you only need to save $1000 a month and not increase it later on as you get raises, promotions, bonuses, etc.  Some retirement plans have you increasing as time goes on and hopes those pay raises, bonuses, etc. come into play.  I like to start with saving exactly what needs to be saved (of course only if it’s possible and won’t leave you starving at the end of the day) and as you do get pay raises you can have fun with that extra income vs. having to save more and more as time goes on.

Lastly, the assumptions we used could be low or high, so this strategy does call for some flexibility as time goes on, but if our assumptions are pretty close, you may not have to change things too much as the years roll on by.

For Step 3, look for my next post…Step 3 – Where should I save for retirement?

2107619 / DOFU 5-2018

Step 4 – Meeting my retirement goals

What tactics/investment vehicles may fit my risk tolerance and time horizon to help me meet my retirement goals?

There are a whole host of investments you can put your money in these days.  Some are products issued by investment firms, insurance companies, banks and federal/state/local governments.

  • CD’s
  • Bonds (Municipal, Treasury, Corporate, International)
  • Exchange Traded Funds (ETF’s)
  • Index Funds
  • Actively Managed Mutual Funds
  • Individual Stocks
  • Real Estate Investment Trusts (REITs)
  • Private Equity
  • Hedge Funds
  • Precious Metals

This list does not contain every investment out there, but these are the most common ones used.  Each has varying fees and expenses as well as advantages and disadvantages.  The important thing to know is which investments are going to be suitable for your risk tolerance and time horizon.  Also, this list isn’t meant to say that you pick just one and go with that.  The list is merely to show you what are some of the more common choices out there and you may find that several are a good fit for your portfolio and offer the diversification and return potential you need or desire.

Neither diversification nor asset allocation guarantee against loss, they are methods used to manage risk

“Look at market fluctuations as your friend rather than your enemy.  Profit from folly rather than participate in it.”  – Warren Buffet

Closing

I sincerely hope this series of articles was enjoyable and educational for you and I would love your feedback.  If you have any suggestions for improvement, or words of encouragement, please reach out to me at larry@midwestwealthadvisors.com

My hope is that the time you spent reading this was of value to you.  The goal was to provide you something to get you started on the retirement savings path or provide a check-up to see what you current financial strategy is doing and if you are on track to your retirement goals.  Hopefully you now have a good idea of what tools and strategies are available to possibly benefit your retirement, how much you may need to save, and some information about financial vehicles and investments that may work with your situation while also taking into account tax-sensitivities.

If you feel my firm can be of help on your journey, please call 763-428-0066 x3 or email appointments@midwestwealthadvisors.com to setup a No-Cost, No-Obligation, 25 minute phone call.

An even easier way to book your call is by clicking on the Click to Schedule button under my picture at the top of the page.

To Smarter Investing,

Lawrence B. Tate, ChFC

Financial Advisor

2107619 / DOFU 5-2018

Which pension option should I choose when I retire?

This question is a big deal!  Why?  Because the vast, vast majority of the time, your decision is irreversible.  You can’t change your mind later.

Always, always, get as much detail as you can from your Human Resource department or whoever handles your pension benefit options.  There, often times, many options to pick from and the whole situation can get confusing real fast.  Also, HR folks are not supposed to give advice. They can tell you your options but not which option is appropriate for you.  This is for good reason, given that they don’t know your whole situation and therefore cannot provide sound advice.

Please, please, please sit down with a trusted advisor, one you have known for years or one you can pay hourly to help you make an informed decision.  It will require some time together and you should disclose your financial situation and most importantly your future life goals.  That will enable your advisor to give you a recommendation that takes into account your entire situation.

I believe that the most critical variable for most when choosing which pension option to go with is the amount of survivor benefit you wish to leave behind for a spouse.  I have seen plans that allow you to leave up to 100% of your pension benefit behind, to as low as 1%.  What this means in practical terms is – say as a hypothetical example for illustrative purposes-  your employer says you are eligible for $4,000 a month of pension benefit for as long as you are alive.  If you pass away, the survivor benefit you leave your spouse could be as much as $4,000 or you could choose to leave $0 behind, the choice is yours and in a lot of states, your spouse as well.  Nothing is free in this world, regardless of what politicians tell us J, so you will also be presented with the costs to leave money behind.

In my above example, say you are eligible for $4000 a month of retirement benefit.  You might then be told that to leave $4000 behind to your spouse should you die first, then you will actually get $3600 a month of benefit, so the cost to leave behind $4000 is $400 a month.  Or you may say your spouse only needs $2000 a month should you die.  The cost then might be $200 a month, therefore your retirement benefit would be $3800.  These are just two examples, of the myriad of options that may be presented to you through your plan.

The reason I say you would meet with an advisor and disclose your whole financial situation is you may have existing financial products or accounts that can be used in concert with whatever pension payout you choose, for your retirement income needs. I have seen this many times, old financial strategies that may just need a second look with an eye to your current needs and situation.

In conclusion, if you are eligible for a pension from your current or past employer, first and foremost consider yourself lucky (these are disappearing rapidly in the modern economy), secondly you may benefit from a Pension Analysis to see if you can possibly help maximize them. Pensions are a great retirement tool, however; very few who receive this income stream really know how it works and give much thought to the irrevocable decision they are about to make. If you have a pension plan as a piece of your retirement, consider seeking assistance from a retirement income specialist who understands the structure and what options are available to maximize your income and leave the most behind for your spouse, beneficiary’s or estate.

As always, please email me at larry@midwestwealthadvisors.com anytime if you think I can be of help.

2011369/DOFU 1-2018

How Important Is a Financial Plan?

This question has come my way many, many times over the last 15+ years.  And I am glad it has.  It’s a great question and it opens the door to fabulous conversations.

In my humble opinion, a fee-based financial plan is extremely important.  It acts as a blueprint to get you moving towards your financial goals.  Would you try and build a house without a blueprint?  You could try, and possibly succeed, but I highly doubt the end result would be as you initially dreamed up and I would imagine it would take a heck of a lot longer to finish that house and at a much higher cost.  And let’s not forget about the added stress…doesn’t seem worth it to me.  Would you ever head out on a two week road trip across the country to Florida or California without some sort of map, directions or way to guide you on your journey?  Of course not!  So why approach your financial life any different?

Whether you are dreaming about paying for your children’s college or putting together your goals, hopes and dreams for retirement, a financial plan will serve as the blueprint for working towards achieving those things.

A financial plan is not a static document that gets put together, and then sits on a shelf somewhere or in a computer file.  No, this plan should be reviewed annually.  Things change, life happens and you need your plan to change with you.

Already retired?  A plan is just as important for you as it is for those saving for retirement.  You need a plan to help ensure your income lasts as long as you do.

Separate from the financial plan and our role as financial planner, we may recommend the purchase of specific investment or insurance products or accounts.  These product recommendations are not part of the financial plan and you are under no obligation to follow them. 2011277/DOFU 1-2018

So What Goes into a Comprehensive Financial Strategy?

So What Goes into a Comprehensive Financial Strategy?

First, identify your goals.  They might look like the following, for example:

  • Pay for 50% to 100% of each child’s college costs
  • Retire at 65 or 68
  • Be able to pay cash for a new car, approximately $30,000, every 6 years
  • Have the option of getting away for a few months every winter, when retired
  • Save up a 20% down payment for next house
  • Balance our spending with our saving and charitable goals
  • Pay off all debt in 7 years
  • Ensure that in the event of my death or disability my family can maintain the same lifestyle that it is used to

The list could be endless.  If you can dream it, put it down.  You then work on prioritizing and running a financial analysis for the various goals you have rated a top priority.

For most people I work with, retirement is the largest – in terms of dollars that will need to be saved – future financial goal they have.  Retirement is most certainly a journey.  And with today’s rising life expectancies (people are living much longer than most ever thought) the journey could be a long one…hopefully a long, FUN journey.  With that being said, I think it’s extremely important to invest a handful of hours up front and a couple every 1-3 years, making sure you are making progress towards this goal.  Your strategy should address things like longevity (how long you might live), as well as the rising costs of things like food, utilities and medical care.  How much risk can you tolerate taking with your investments?  Your strategy will require some assumptions like rate of return, taxes and future income needs.  These things should be looked at and updated and changed if need be.

2011290/DOFU 1-2018