THE RETIREMENT REALITY CHECK

Little things to keep in mind for life after work.

Decades ago, there was a popular book entitled What They Don't Teach You at Harvard Business School. Perhaps someday, another book will appear to discuss certain aspects of the retirement experience that go unrecognized - the "fine print", if you will. Here are some little things that can be frequently overlooked.  

  

How will you save in retirement? 

More and more baby boomers are retiring with the hope that they can become centenarians. That may prove true thanks to healthcare advances and generally healthier lifestyles.

 

We all save for retirement; with our increasing longevity, we will also need to save inretirement for the (presumed) decades ahead. That means more than budgeting; it means investing with growth and tax efficiency in mind year after year. 

 

Could your cash flow be more important than your savings? 

While the #1 retirement fear is someday running out of money, your income stream may actually prove more important than your retirement nest egg. How great will the income stream be from your accumulated wealth? 

  

There's a longstanding belief that retirees should withdraw about 4% of their savings annually. This "4% rule" became popular back in the 1990s, thanks to an influential article written by a financial advisor named Bill Bengen in the Journal of Financial Planning. While the "4% rule" has its followers, the respected economist William Sharpe (one of the minds behind Modern Portfolio Theory) dismissed it as simplistic and an open door to retirement income shortfalls in a widely cited 2009 essay in the Journal of Investment Management.1,2 

  

Volatility is pronounced in today's financial markets, and the relative calm we knew prior to the last recession may take years to return. Because of this volatility, it is hard to imagine sticking to a hard-and-fast withdrawal rate in retirement - your annual withdrawal percentage may need to vary due to life and market factors.

  

What will you begin doing in retirement? 

In the classic retirement dream, every day feels like a Saturday. Your reward for decades of work is 24/7 freedom. But might all that freedom leave you bored?

 

Impossible, you say? It happens. Some people retire with only a vague idea of "what's next". After a few months or years, they find themselves in the doldrums. Shouldn't they be doing something with all that time on their hands? 

 

A goal-oriented retirement has its virtues. Purpose leads to objectives, objectives lead to plans, and plans can impart some structure and order to your days and weeks - and that can help cure retirement listlessness.

 

Will your spouse want to live the way that you live?

Many couples retire with shared goals, but they find that their ambitions and day-to-day routines differ. Over time, this dissonance can be aggravating. A conversation or two may help you iron out potential conflicts. While your spouse's "picture" of retirement will not simply be a mental photocopy of your own, the variance in retirement visions may surprise you.  

  

When should you (and your spouse) claim Social Security benefits?

"As soon as possible" may not be the wisest answer. An analysis is needed. Talk with the financial professional you trust and run the numbers. If you can wait and apply for Social Security strategically, you might realize as much as hundreds of thousands of dollars more in benefits over your lifetimes.

Possibly the Most Powerful Investment Available Today

Today may be the most difficult time in history to retire.  With a long-standing low interest rate environment, degradation of pensions and rising healthcare costs coupled with longer life-spans, it is a struggle for many to even imagine maintaining a decent lifestyle throughout retirement.  But still one of the predominant goals of todays retirees is to leave something for the next generation.

Yesterday's planning advice included portfolio preservation and at best, basic life insurance policies for wealth transfer.  For many that was the best advice available.  As all things change, so does the preferred strategies to transfer wealth.  Today's tumultuous landscape has given rise to some of the most clever planning strategies to date.

Wealth Transfer Strategies for Today

Previous planning techniques would support the importance of permanent life insurance for estate planning.  With unmatched tax benefits and guaranteed wealth transfer to beneficiaries, life insurance has always been at the top of the list.

Today, although still viable, there may be even better options to build wealth for future generations.  As you will see in the following examples, yesterdays model cannot compete with the strategies of today:

DISCLAIMER:  For simplicities sake, illustrations are compiled from the same insurance company using identical assumed interest rates of 7.2%.  The historical lowest 40 year interest crediting rate is 7.8%.  

The Doctor Who Created an $8 Million Estate

A 69 year old doctor wants to leave $2,000,000 to split between his two sons.  One son is 36, the other is age 39.  The good doctor is recommended to buy life insurance by his CPA and advisor.  Because the doctor had taken care of his health he could purchase a two million dollar life insurance policy by paying about $600,000.  At his age he sees a tremendous value of being able to guarantee his money more than triples and passes tax free to his boys.

Soon the doctor learns about another option, something that could increase his money by almost 17 TIMES!  Instead of purchasing a policy for himself, he is recommended to purchase a specialized life insurance policy on each of his boys.  In this scenario he pays only $100,000 per year for 5 years.  He never pays again, and saves himself over $130,000.  What happens next is incredible.  Each of the boys are assumed to retire in their sixties.  They each draw more than $135,000 a year of tax-free income from the policies that they never pay back.  If each of them live until they are 90, combined, they would have withdrawn almost 6.5 Million dollars.  In addition, there is a remaining death benefit totaling an additional almost $2,000,000 that passes to his grand children tax free.  With todays strategy, the good doctor could create a whopping multi-generational estate of over 8 Million Dollars!

The Dad Who Multiplied his Investment by 62

Or consider the dad with a 3 year old daughter.

Of course the father would like to leave some money to his daughter later in life.  If he does it the old fashion way he can turn $125,000 into over $500,000 of tax free inheritance.  With today's strategy he can ultimately spend $62,000 to create a retirement fund for his young daughter.  When his daughter reaches age 66 she begins to withdraw over 120,000, tax-free, dollars per year.  By age 90 she has received over 3 Million dollars!  And, again, there is an additional benefit to his future grandchildren of almost $900,000.  In this case the father created a multigenerational estate worth over 62 times his original investment.

These new strategies are potentially more powerful than any other financial tool available today.  Although laden with numbers, it is important to review these two situations multiple times to fully understand the importance of planning correctly for your own children and grand-children.  These strategies work for almost all age groups and income levels.  It may be just the right time to look at wealth planning differently.

That First RMD from Your IRA

What you need to know.

When you reach age 70½, the IRS instructs you to start making withdrawals from your Traditional IRA(s). These IRA withdrawals are also called Required Minimum Distributions (RMDs). You will make them annually from now on.1

   

If you fail to take your annual RMD or take out less than what is required, the IRS will notice. You will not only owe income taxes on the amount not withdrawn, you will owe 50% more. (The 50% penalty can be waived if you can show the IRS that the shortfall resulted from a "reasonable error" instead of negligence.)1

   

Many IRA owners have questions about the options and rules related to their initial RMDs, so let's answer a few.

   

How does the IRS define age 70½? 

Its definition is pretty straightforward. If your 70th birthday occurs in the first half of a year, you turn 70½ within that calendar year. If your 70th birthday occurs in the second half of a year, you turn 70½ during the subsequent calendar year.2 

Your initial RMD has to be taken by April 1 of the year after you turn 70½. All the RMDs you take in subsequent years must be taken by December 31 of each year.3

So, if you turned 70 during the first six months of 2014, you will be 70½ by the end of 2014 and you must take your first RMD by April 1, 2015. If you turn 70 in the second half of 2014, then you will be 70½ in 2015 and you don't need to take that initial RMD until April 1, 2016.2

Is waiting until April 1 of the following year to take my first RMD a bad idea?

The IRS allows you three extra months to take your first RMD, but it isn't necessarily doing you a favor. Your initial RMD is taxable in the year it is taken. If you postpone it into the following year, then the taxable portions of both your first RMD and your second RMD must be reported as income on your federal tax return for that following year.2 

An example: James and his wife Stephanie file jointly, and they earn $73,800 in 2014 (the upper limit of the 15% federal tax bracket). James turns 70½ in 2014, but he decides to put off his first RMD until April 1, 2015. Bad idea: this means that he will have to take two RMDs before 2015 ends. So his taxable income jumps in 2015 as a result of the dual RMDs, and it pushes them into a higher tax bracket for 2015. The lesson: if you will be 70½ by the time 2014 ends, take your initial RMD by the end of 2014 - it might save you thousands in taxes to do so.4

How do I calculate my first RMD? 

IRS Publication 590 is your resource. You calculate it using IRS life expectancy tables and your IRA balance on December 31 of the previous year. For that matter, if you Google "how to calculate your RMD" you will see links to RMD worksheets at irs.gov and free RMD calculators provided by the Financial Industry Regulatory Authority (FINRA), Kiplinger, Bankrate and others.2,5 

If your spouse is at least 10 years younger than you and happens to be designated as the sole beneficiary for one or more IRAs you own, you should refer to Publication 590 instead of a calculator; the calculator may tell you that the RMD is larger than it actually is.6

   

If you have your IRA with one of the big investment firms, it might calculate your RMD for you and offer to route the amount into another account that you specify. Unless you state otherwise, it will withhold taxes on the amount of the RMD as required by law and give you and the IRS a 1099-R form recording the income distribution.2,5 

   

When I take my RMD, do I have to withdraw the whole amount? 

No. You can also take it in smaller, successive withdrawals. Your IRA custodian may be able to schedule them for you.3

        

What if I have multiple traditional IRAs? 

You then figure out your total RMD by adding up the total of all of your traditional IRA balances on December 31 of the prior year. This total is the basis for the RMD calculation. You can take your RMD from a single IRA or multiple IRAs.1 

What if I have a Roth IRA? 

If you are the original owner of that Roth IRA, you don't have to take any RMDs. Only inherited Roth IRAs require RMDs.2 

It doesn't pay to wait. 

At the end of 2013, Fidelity Investments found that 14% of IRA owners required to take their first RMD hadn't yet done so - they were putting it off until early 2014. Another 40% had withdrawn less than the required amount by December 31. Avoid their behaviors, if you can: when it comes to your initial RMD, procrastination can invite higher-than-normal taxes and a risk of forgetting the deadline.2 

Citations. 1 - irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-Required-Minimum-Distributions [7/3/14] 2 - tinyurl.com/ktabwnv [3/30/14] 3 -schwab.com/public/schwab/investing/retirement_and_planning/understanding_iras/withdrawals_and_distributions/age_70_and_a_half_and_over[9/11/14] 4 - bankrate.com/finance/taxes/tax-brackets.aspx [9/11/14] 5 - google.com/search?q=how+to+calculate+your+RMD&ie=utf-8&oe=utf-8&aq=t&rls=org.mozilla:en-US:official&client=firefox-a&channel=sb[9/11/14] 6 - kiplinger.com/tool/retirement/T032-S000-minimum-ira-distribution-calculator-what-is-my-min/ [1/14]

Debunking a Few Popular Retirement Myths

Certain misconceptions ignore the realities of retirement.

Generalizations about money & retirement linger.  Some have been around for decades, and some new cliches have recently joined their ranks.  Let's examine a few.

"When I'm retired, I won't really have to invest anymore".

Many people see retirement as an end instead of a beginning – a finish line for a career. In reality, retirement can be the start of a new and promising phase of life that could last a few decades. If you stop investing entirely, you can risk losing purchasing power; even moderate inflation can devalue the dollars you've saved.1

"My taxes will be lower when I retire".

You may earn less, and that could put you in a lower tax bracket. On the other hand, you may end up waving goodbye to some of the deductions and exemptions you enjoyed while working, and state and local taxes will almost certainly rise with time. So while your earned income may decrease, you may end up losing a comparatively larger percentage of it to taxes after you retire.1   

"I started saving too late, I have no hope of retiring - I'll have to work until I'm 85".

If your nest egg is less than six figures, working longer may be the best thing you can do. You will have X fewer years of retirement to plan for, so you can keep earning a salary, and your savings can compound longer. Don't lose hope: remember that you can make larger, catch-up contributions to IRAs after 50. If you are 50 or older this year, you can put as much as $23,000 into a 401(k) plan. Some participants in 403(b) or 457(b) plans are also allowed that privilege. You can downsize and reduce debts and expenses to effectively give you more retirement money. You can also stay invested (see above).1,2 

"I should help my kids with college costs before I retire".

That's a nice thought, but you don't have to follow through on it. Remember, there is no retiree "financial aid." Your student can work, save or borrow to pay for the cost of college, with decades ahead to pay back any loans. You can't go to the bank and get a "retirement loan." Moreover, if you outlive your money your kids may end up taking you in and you will be a financial burden to them. So putting your financial needs above theirs is fair and smart as you approach retirement. 

"I'll live on less when I'm retired".

We all have the cliché in our minds of a retired couple in their seventies or eighties living modestly, hardly eating out and asking about senior discounts. In the later phase of retirement, couples often choose to live on less, sometimes out of necessity. The initial phase of retirement may be a different story. For many, the first few years of retirement mean traveling, new adventures, and "living it up" a little – all of which may mean new retirees may actually "live on more" out of the retirement gate.

"No one really retires anymore".

We all have the cliché in our minds of a retired couple in their seventies or eighties living modestly, hardly eating out and asking about senior discounts. In the later phase of retirement, couples often choose to live on less, sometimes out of necessity. The initial phase of retirement may be a different story. For many, the first few years of retirement mean traveling, new adventures, and "living it up" a little – all of which may mean new retirees may actually "live on more" out of the retirement gate.

There is no "generic" retirement experience, and therefore, there is no one-size-fits-all retirement plan. Each individual, couple or family needs a strategy tailored to their particular money situation and life and financial objectives.

Citations.

1 - tiaa-cref.org/public/advice-guidance/education/financial-ed/empowering_women/retirement-myths [8/29/14]

2 - 401k.fidelity.com/public/content/401k/Home/HowmuchcanIcontrib [8/29/14]

The Trouble with Federal Bonds Today - A Short Story

The Story:

Imagine a long lost uncle, Sammy, comes knocking at your door looking for a loan.  Of course you want to help, but you aren't foolish enough to give your money away blindly. Sammy tells you not to worry as he has a very nice annual income of $250,323.  So you think, "well, with income like that, there is no way that Uncle Sammy won't be able to pay me back".  But, being the due diligent person that you are, you ask Sammy to share his balance sheet with you.  Uncle Sammy is a bit hesitant, but obliges.  As you look over his balance sheet, a different story emerges.  Maybe loaning money to Sammy is not such a good idea after all!  Let's take a closer look at that balance sheet:

Annual Income:  $250,323 - Exactly what Uncle Sammy stated.

Annual Spending:  $354,142 - Wait a minute! Uncle Sammy spends $103,819 more than what he brings in every year!  This is not looking too good!

Credit Card Debt:  $$1,669,843!!! - What the heck!  Crazy Uncle Sammy has racked-up more than a million dollars in credit card debt!

After reviewing Sammy's balance sheet, you inform him that there is NO WAY THAT YOU ARE GOING TO LEND HIM ANY MONEY!

The moral of the story is:

Loaning money to our government in the form of bonds is a very bad idea.  You wouldn't, and shouldn't help Crazy Uncle Sammy with a loan.  Keep in mind this sample balance sheet deals in hundreds of thousands of dollars.  Uncle Sammy's balance sheet is like the U.S. Federal Government balance sheet... Simply adjust to TRILLIONS OF DOLLARS.

Click Here To View The U.S. Governments Current Debt

Three major problems to avoid when buying ERISA Fidelity Bonds

If you have ever administered a 401k, are a fiduciary of a pension plan, or own a company that offers a retirement plan to your employees, you have probably heard of an ERISA bond. Nevertheless, the true importance of this seemingly insignificant policy is drastically underestimated, even by financial professionals.

Although it is important to know about the history of ERISA bonding, this article will focus on how the most common use of these bonds allows the Department of Labor easy access to personal and corporate financial information. 

What is ERISA?

The Employee Retirement Income Security Act of 1974 (ERISA) stipulates the regulations for fiduciaries of covered employee benefit plans, such as 401k's. These laws are intended to protect the plan assets from theft and fraud from those who are responsible for them. Part of that protection is a mandated fidelity bond that is required to cover at least 10% of the plan assets up to a maximum of $500,000 (there are some exceptional circumstances that raise that limit to $1,000,000, for example, if the plan holds its own securities). Generally, that is a good thing, since it protects employees by reimbursing them in the event of theft and/or fraud.

Problems and Solutions

Ensuring that insurance plans are compliant with the law may generate a variety of problems. More often than not, these issues stem from the ERISA bond. There are three main problems with the way ERISA Bond purchasing is currently handled:

Problem #1: Purchasing the bond

The primary problem arises when the bond is purchased. Although there is a standard bond purchasing procedure, it often exposes the bond holder to unwanted and invasive scrutiny.

Here's how:

Generally, your plan administrator will inform you that you need an ERISA Fidelity bond appended to your 401k once you have the plan, and advise that your insurance agent can arrange it for you. Insurance agents tend to add the ERISA bond as a rider to your corporate criminal policy, which can compromise your privacy. If the Department of Labor decides to investigate you, the easiest thing for them to inquire about is if you are compliant with your bond. ERISA law prohibits the applications of deductibles to bonds. This allows the Department of Labor to access your entire corporate policy without having to force an audit.  

SOLUTION #1: a stand alone policy for the bond

Problem #2:  Bond Term

A rider usually covers you for only one year. Therefore, you have to amend the rider every year to ensure that you are covered. Unfortunately this requirement is often overlooked by actuaries and/or administrators.

SOLUTION #2: a three-year stand alone policy 

Problem #3:  Compliance with the law

Once you have a three-year stand alone policy there is still one more potential problem. ERISA law mandates that you have at least 10% of your plan covered. For example, a plan worth one million dollars requires a bond that covers one-hundred thousand dollars. However, if your plan performs well and grows, but you fail to increase your minimum coverage, you will no longer be compliant with the law!

SOLUTION #3: purchase THE RIGHT POLICY  

Simple recommendations:

Purchase a three-year stand alone policy with an "inflation guard" that automatically adjusts to plan growth up to 10%. Bleier Insurance Group provides simple, fast and efficient service into the future, helping you buy the right bond, protecting your personal and corporate privacy, and ensuring compliance with the law. 

Speak to your Bleier Insurance Group representative today!