Objective information about financial planning, investments, and retirement plans

Am I on Track for Retirement?

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Financial advisors are frequently asked some version of the question “Can I Retire?”  The Employee Benefit Research Institute (EBRI) recently released its 2018 Retirement Confidence Survey. The latest survey offered several key findings:

  • Only 32% of retirees surveyed felt confident that they will be able to live comfortably throughout their retirement.
  • Retiree confidence in their ability to over basic expenses and medical expenses in retirement dropped from 2017 levels.
  • Less than one-half of the retirees surveyed felt confident that Medicare and Social Security would be able to maintain benefits at current levels.

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It is essential that Baby Boomers and others approaching retirement take a hard look at their retirement readiness to determine any gaps between the financial resources available to them and their desired lifestyle in retirement. Ask yourself a few questions to determine if you can retire.

What kind of lifestyle do you want in retirement?

You’ll find general rules of thumb indicating you need anywhere from 70% to more than 100% of your pre-retirement income during retirement. Look at your individual circumstances and what you plan to do in retirement.

  • Will your mortgage be paid off?
  • Do you plan to travel?
  • Will you live in an area with a relatively high or low cost of living?
  • What’s your plan to cover the cost of healthcare in retirement?

Remember spending during retirement is not uniform. You will likely be more active earlier in your retirement.  Though you may spend less on activities as you age, it is likely that your medical costs will increase as you age.

How much can you expect from Social Security?

Social Security benefits were never designed to be the sole source of retirement income, but they are still a valuable source of retirement income. Those with lower incomes will find that Social Security replaces a higher percentage of their pre-retirement income than those with higher incomes.

Recent news stories indicating that the Social Security trust fund is in trouble is not welcome news for those nearing retirement or for current retirees.

What other sources of retirement income will you have?

Other potential sources of retirement income might include a defined-benefit pension plan; individual retirement accounts (IRAs); your 401(k) plan, and your spouse’s employer-sponsored retirement plans. If you have other investments, it is important to have a strategy that maximizes these assets for your retirement.

If you are fortunate enough to be covered by a workplace pension, be sure to understand how much you will receive at various ages.  Look at your options in terms of survivor benefits should you predecease your spouse.  If you have the option to take a lump-sum distribution it might make sense to roll this over to an IRA.  Also determine if your employer offers any sort of insurance coverage for retirees. 

Where does this leave me? 

At this point let’s take a look at where you are.  We’ll assume that you’ve determined that you will need $100,000 per year to cover your retirement needs on a gross (before taxes are paid) basis.  Let’s also assume that your combined Social Security will be $30,000 per year and that there will be $20,000 in pension income.  The retirement gap is:

Amount Needed

$100,000

Social Security

30,000

Pension

20,000

Gap to be filled from other sources

$50,000

 

Where will this $50,000 come from?  The most likely source is your retirement savings.  This might include 401(k)s, IRAs, taxable accounts, self-employment retirement accounts, the sale of a business, and inheritance, earnings during retirement, or other sources. 

To generate $50,000 per year you would likely need a lump sum in the range of $1.25 – $1.67 million at retirement.

Everybody’s circumstances are different.  Many retirees do not have a pension plan available to them, some don’t have a 401(k) either.

Look at where you stand and take action 

Some steps to consider if you feel you are behind in your retirement savings:

  • Save as much as possible in your 401(k) or other workplace retirement plan while you are still employed
  • Contribute to an IRA
  • If you are self-employed start a retirement plan for yourself
  • Keep your spending in check
  • Scale back on your retirement lifestyle if needed
  • Plan to delay your retirement or to work part-time during retirement

Providing for a comfortable retirement takes planning. Don’t be lulled into thinking your 401(k) plan alone will be enough. If you haven’t put together a financial plan, don’t be afraid to enlist the aid of a professional if you need help.

NEW SERVICE – Do you have questions about retirement planning and making the financial transition to retirement? Schedule a coaching call with me to get answers to your questions.

Approaching retirement and want another opinion on where you stand? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for more detailed advice about your situation.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Please check out the Hire Me tab to learn more about my freelance financial writing and financial consulting services. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

Photo credit:  Wikipedia

Stock Market Highs and Your Retirement

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The Dow Jones Industrial Average closed above 25,000 for the first time ever last week. The Nasdaq closed about the 7,000 mark for the first time as well. The S&P 500 Index closed above 2,700 to round out one of the best weeks ever for the stock market.

Perhaps this is due to the new tax laws passed at the end of last year. Perhaps this is a continuation of the very solid gains in the stock market that we saw in 2017. These gains were in spite of the hurricanes in Texas, Florida and Puerto Rico, as well questions and issues surrounding the Trump administration and the situation with North Korea.

Difference Between Stocks and Bonds

At some point we are bound to see a stock market correction of some magnitude, hopefully not on the order of the 2008-09 financial crisis. As someone saving for retirement what should you do now?

Review and rebalance 

During the last market decline there were many stories about how our 401(k) accounts had become “201(k)s.” The PBS Frontline special The Retirement Gamble put much of the blame on Wall Street and they are right to an extent, especially as it pertains to the overall market drop.

However, some of the folks who experienced losses well in excess of the market averages were victims of their own over-allocation to stocks. This might have been their own doing or the result of poor financial advice.

This is the time to review your portfolio allocation and rebalance if needed.  For example your plan might call for a 60% allocation to stocks but with the gains that stocks have experienced you might now be at 70% or more.  This is great as long as the market continues to rise, but you are at increased risk should the market head down.  It may be time to consider paring equities back and to implement a strategy for doing this.

Financial Planning is vital

If you don’t have a financial plan in place, or if the last one you’ve done is old and outdated, this is a great time to have one done. Do it yourself if you’re comfortable or hire a fee-only financial advisor to help you.

If you have a financial plan this is an ideal time to review it and see where you are relative to your goals. Has the market rally accelerated the amount you’ve accumulated for retirement relative to where you had thought you’d be at this point? If so this is a good time to revisit your asset allocation and perhaps reduce your overall risk.

Learn from the past 

It is said that fear and greed are the two main drivers of the stock market. Some of the experts on shows like CNBC seem to feel that the market still has some upside. Maybe they’re right. However don’t get carried away and let greed guide your investing decisions.

Manage your portfolio with an eye towards downside risk. This doesn’t mean the markets won’t keep going up or that you should sell everything and go to cash. What it does mean is that you need to use your good common sense and keep your portfolio allocated in a fashion that is consistent with your retirement goals, your time horizon and your risk tolerance.

Approaching retirement and want another opinion on where you stand? Not sure if you are invested properly for your situation? Check out my Financial Review/Second Opinion for Individuals service.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Please check out the Hire Me tab to learn more about my freelance financial writing and financial consulting services.  

Photo credit:  Phillip Taylor PT

A Pre-Retirement Financial Checklist

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Are you within a few years of retirement? It’s time to get your financial house in order. We are now almost eight years into a bull market for stocks that has seen the S&P 500 move from 677 at the lows of the financial crises to a recent intraday high of over 2,350. Hopefully these stock market highs have favorably impacted your retirement readiness?

Here are several items to include on your pre-retirement financial checklist.

Review your company benefits  

Your 401(k) plan might be your largest and most significant employee benefit, but there may be others to consider as well. Does your company offer any sort of retiree medical coverage? Are there other benefits that you can continue at reduced group rates?

In the case of your 401(k) you will have choices to make at retirement. You will need to determine if you want to leave it with your soon-to-be-former employer, roll it into an IRA, or take a distribution. The last choice will likely result in a hefty tax bill, so this is generally not a good idea for most folks.

Do you have company stock options that you haven’t exercised? Check the rules here. Speaking of company stock, there are special rules called net unrealized appreciation to consider when dealing with company stock held in your 401(k) plan.

Do you have a pension from your current or former employer?

While a pension is certainly an employee benefit, I feel that it deserves its own section. You might have several decisions to make regarding your pension benefit if you are fortunate enough to be covered by one.

  • Do you take the benefit immediately upon retirement, or wait?
  • If you have the option, do you take the pension as a lump-sum and roll over to an IRA or take it as a monthly annuity?
  • Generally, there will be several annuity payment options to consider, which one is right for your situation?

These decisions should be made in the context of your overall financial situation and your ability to effectively manage a lump sum. Since any lump-sum would be taxable if taken as a distribution, it is usually advisable for you to roll it over into a tax-deferred account such as an IRA. If you have earned a pension benefit from a former employer, be sure to contact your old company to get all the details and to make sure they have your current address and contact information so there are no delays or glitches when you want to start drawing on this pension.

Determine your Social Security benefits and when to take them

While you can start taking Social Security at age 62, there is a significant reduction in your monthly benefit as opposed to waiting until your full retirement age. Further, if you can wait until age 70 your benefit level continues to grow. If you are married the planning should involve both spouses’ benefits. There are several planning opportunities for married couples around when each spouse should claim their benefit.

Review your retirement financial resources 

Over the course of your working life you have likely accumulated a variety of investments and other assets that can be used to fund your retirement which might include:

  • Your 401(k)or similar retirement plan such as a 403(b) or other defined contribution plan.
  • IRA accounts, both traditional and Roth.
  • A pension.
  • Stock options or restricted stock units.
  • Social Security
  • Taxable investment accounts.
  • Cash, savings accounts, CDs, etc.
  • Annuities
  • Cash value in a life insurance policy
  • Inheritance
  • Interest in a business
  • Real estate
  • Any income from working into retirement

In the years prior to retirement it is a good idea to review all your anticipated assets and retirement resources to determine how they can be best utilized to support your desired retirement lifestyle.

Determine how much you will need to support your retirement lifestyle 

While this might seem intuitive you’d be surprised how many folks within a few years of retirement haven’t done this. Basically, you will want to put together a budget. Will you stay in your home or downsize? What activities will you engage in? What will your basic living expenses be? And so on.

Compare this to the income that your various retirement resources might generate for you and you will have a good idea if you will be able to support your desired lifestyle in retirement. If there is a gap, you still have some time to make adjustments to close that gap.

You will need to do some planning in terms of which financial resources to tap and the sequencing of these withdrawals over the course of your retirement.

This is a very cursory “checklist” for Baby Boomers and others within a few years of retirement. This might be a good point to engage the services of a fee-only financial advisor if you’ve never done a financial plan, or if your plan is out of date. Retirement can be a great time of life, but proper planning is required to help ensure your financial success.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Please check out the Hire Me tab to learn more about my freelance financial writing and financial consulting services. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

My services

Approaching retirement and want another opinion on where you stand? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service.

Financial advisors are you looking to ramp up your content marketing? Contact me regarding my ghost writing services for advisors.

Resources to consider

Check out Personal Capital’s retirement planning tools to be sure you are on trackPersonal Capital can help you organize your entire financial picture and provide advice if needed.

Looking to learn more about investing and financial planning? Whether you do it yourself or work with a financial advisor, the Fire Your Financial Advisor online course from the White Coat Investor can help. Make this the year you invest in yourself. Be sure you have the knowledge and the tools to thrive in today’s complex financial environment.

(Note these are affiliate links, I receive a fee if you enroll at no extra cost to you)

Should You Accept a Pension Buyout Offer?

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Corporate pension buyout offers have been in the news in recent years with companies like Hartford Financial Services offering lump-sum payment options to vested former employees and with Boeing offering a choice of lump-sum or annuity payments to a similar group. Note these offers are not available to retirees who have already taken their pension benefit.

The answer to the question of whether you should accept a pension buyout offer versus taking your pension as a lifetime stream of monthly payment is that it depends upon your situation. Here are a few things to consider.

Are they sweetening the deal? 

Perhaps the lump-sum is a bit larger, and in the case of the Boeing offer the annuity payments were a bit better as well. Or perhaps there normally wouldn’t be a lump-sum option available from the pension plan so this in and of itself is an incentive.

Remember the incentive for the companies offering these deals is to get rid of these future pension liabilities. The potential cost savings and impact on their future profitability is huge. 

Can you manage the lump-sum? 

The decision to take your pension as a lump-sum vs. a stream of payments is always a tough decision. A key question to ask yourself is whether you are equipped to manage a lump-sum payment. Ideally you would be rolling this lump-sum into an IRA account and investing it for your retirement. Are you comfortable managing this money?  If not are you working with a trusted financial advisor who can help you?

There has been much written about financial advisors who troll large organizations (both governmental and corporate) looking for large numbers of folks with lump-sums to rollover. In some cases, these advisors have moved this rollover money into investments that are wholly inappropriate for these investors. As always be smart with your money and with your trust.  Be informed and ask lots of questions.

Do you have concerns about the company’s financial health? 

Do you have doubts about the future solvency of the organization offering the pension? This pertains to both a public entity (can you say Detroit?) and to for-profit organizations like Hartford Financial and Boeing. In the latter case pension payments are guaranteed up to certain monthly limits set by the PBGC. If you were a high-earner and your monthly payment exceeds this limit you could see your monthly payment reduced.

While I am not familiar with the financial state of either Hartford Financial or Boeing I’m guessing their financial health is not a major issue. If you receive a buyout offer you might consider taking it if you have concerns that your current or former employer may run into financial difficulties down the road.

Who guarantees the annuity payments? 

If the buyout offer includes an option to receive annuity payments make sure that you understand who is guaranteeing these payments. Generally, if a company is making this type of offer they are looking to reduce their future pension liability and they will transfer your pension obligation to an insurance company. They will be the one’s making the annuity payments and ultimately guaranteeing these payments.

This is not necessarily a bad thing but you need to understand that your current or former employer is not behind these payments nor is the PBCG. Typically, if an insurance company defaults on its obligations your recourse is via the appropriate state insurance department. The rules as to how much of an annuity payment is covered will vary.

The impact of inflation

An additional consideration in evaluating a buy-out option that includes annuity payments of this type is the fact that most of these annuities will not include cost of living increases. This means that the buying power of these payments will decrease over time due to inflation. 

What other retirement resources do you have? 

If you will be eligible for Social Security and/or have other pension plans it quite possibly will make sense to take a buyout offer that includes a lump-sum. Review all of your retirement accounts and those of your spouse if you are married.  This includes 401(k) plans, 403(b) accounts, IRAs, etc. This is a good time to take stock of your retirement readiness and perhaps even to do a financial plan if don’t have a current one in place.

The Bottom Line

I’m generally a fan of pension buyout offers, especially if there is a lump-sum option. As with any financial decision it is wise to look at your entire retirement and financial situation and to have a plan in place to manage this money.  Where an annuity is also available you need to understand who will be behind the annuity and to analyze whether this is a good deal for you. Be prepared to deal with an offer if you receive one.

Approaching retirement and want another opinion on where you stand? Have you been offered a pension buyout or early retirement package? Check out my Financial Review/Second Opinion for Individuals service.

NEW SERVICE – Do you have questions about retirement planning and making the financial transition to retirement? Schedule a coaching call with me to get answers to your questions.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Please check out the Hire Me tab to learn more about my freelance financial writing and financial consulting services. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

Is a $100,000 Per Year Retirement Doable?

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Is a $100,000 a Year Retirement Doable?

A 2013 New York Times article discussed that a $1 million retirement nest egg isn’t what it used to be.  While this is more than 90% of U.S. retirees have amassed, $1 million doesn’t go as far as you might think.  That said I wanted to take a look at what it takes to provide $100,000 income annually during retirement.

The 4% rule 

The 4% rule says that a retiree can safely withdraw 4% of their nest egg during retirement and assume that their money will last 30 years.  This very useful rule of thumb was developed by fee-only financial planning superstar Bill Bengen.

Like any rule of thumb it is just that, an estimating tool.  At you own peril do not depend on this rule, do a real financial plan for your retirement.

Using the 4% rule as a quick “back of the napkin” estimating tool let’s see how someone with a $1 million combined in their 401(k)s and some IRAs can hit $100,000 (gross before any taxes are paid). Note this is not to say that everyone needs to spend $100,000 or any particular amount during their retirement, but rather this example is simply meant to illustrate the math involved.

Doing the math 

The $1 million in the 401(k)s and IRAs will yield $40,000 per year using the 4% rule.  This leaves a shortfall of $60,000 per year.

A husband and wife who both worked might have Social Security payments due them starting at say a combined $40,000 per year.

The shortfall is now down to $20,000

Source of funds

Annual income

Retirement account withdrawals

$40,000

Social Security

$40,000

Need

$100,000

Shortfall

$20,000

 

Closing the income gap 

In our hypothetical situation the couple has a $20,000 per year gap between what their retirement accounts and Social Security can be expected to provide.  Here are some ways this gap can be closed:

  • If they have significant assets outside of their retirement accounts, these funds can be tapped.
  • Perhaps they have one or more pensions in which they have a vested benefit.
  • They may have stock options or restricted stock units that can be converted to cash from their employers.
  • This might be a good time to look at downsizing their home and applying any excess cash from the transaction to their retirement.
  • If they were business owners, they might realize some value from the sale of the business as they retire.
  • If realistic perhaps retirement can be delayed for several years.  This allows the couple to not only accumulate a bit more for retirement but it also delays the need to tap into their retirement accounts and builds up their Social Security benefit a bit longer.
  • It might be feasible to work full or part-time during the early years of retirement.  Depending upon one’s expertise there may be consulting opportunities related to your former employment field or perhaps you can start a business based upon an interest or a hobby.

Things to beware of in trying to boost your nest egg 

The scenario outlined above is hypothetical but very common.  As far as retirement goes I think financial journalist and author Jon Chevreau has the right idea:  Forget Retirement Seek Financial Independence.

NEW SERVICE – Do you have questions about retirement planning and making the financial transition to retirement? Schedule a coaching call with me to get answers to your questions.

Approaching retirement and want another opinion on where you stand? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for more detailed advice about your situation.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Please check out the Hire Me tab to learn more about my freelance financial writing and financial consulting services. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.