Building a Better Financial Life
First, we highly recommend you read: Retirement Planning, How to Generate Reliable Income and Avoid the Most Dangerous Games, written by Julie R. Abrams. Julie discusses simple, important concepts that will allow you to fully understand all your choices for Maximum Income payout at retirement.
It's popular to speculate about how long Social Security will last. The biggest decision with Social Security involves when exactly you should start your benefits. You can begin taking them at age 62, but taking them that early can reduce your benefits by 25 or 30 percent, depending on what your Full Retirement Age (FRA) is. Similarly, by delaying your benefits, you can increase your payment by 8 percent for each year you wait past your FRA. If you utilize some of the other sources of Guaranteed Retirement Income we'll discuss, you may be able to put off Social Security, thereby increasing your total Social Security benefits. Social Security planning involves a lot of moving pieces, so it's important to consider all of your options before deciding when and how to take them. Give us a call to see how you can maximize your benefits and your Guaranteed Retirement Income.
The number of companies offering defined benefit pension plans has been declining, but there are still plenty of businesses offering them. If you're fortunate enough to have a defined benefit pension, you can use it to cover a big portion of your Guaranteed Income in retirement. Even with a defined benefit pension, you may still need to find other sources of Guaranteed Income. Maybe your pension won't cover all of your monthly expenses, or, perhaps, the pension will be significantly reduced or even eliminated when you pass away, leaving little Guaranteed Income for your spouse. One common wrinkle with defined benefit pensions is the offer of a buyout. Many companies are trying to rid themselves of the long-term obligation of pensions. To get pensions off their books, they offer participants lump-sum payments instead of an annual stream of payments. If a lump-sum option appeals to you, there are many ways you can convert that lump sum into Guaranteed Retirement Income. When making pension decisions, you should consult with your insurance professional so you are aware of other Guaranteed Income opportunities.
Immediate annuities are one of the oldest methods of creating Guaranteed Income. They were even used by ancient Romans to pay for future expenses. Romans would make one-time payments to the Emperor's annual fund, and in exchange, they would receive a lifetime stream of income. Immediate annuities aren't much different today, aside from the fact you don't make payments to the Emperor. Today's immediate annuities are offered by life insurance companies. First, you make a lump-sum payment to the insurance company. They calculate a regular income payment based on your life expectancy, the initial amount of money, and prevailing interest rates. You then receive that payment for the rest of your life, no matter how long you live. There are a few twists to the immediate annuity that can help you customize the payment to meet your specific situation. You can choose a joint payment that covers two lives. You can also choose a period certain payment. If you pass away within a certain period of time, your beneficiaries will continue to receive the payments for the remainder of the predetermined time period. You can also add optional features, such as an inflation rider, so the payment increases each year. Some of these variations may lower the actual payment, so you'll have to analyze each option and weigh it against the costs and benefits. Immediate annuity payments are backed up by the faith and credit of the insurance company that's underwriting the annuity contract. Most insurance companies that offer immediate annuities are longstanding, stable, and successful businesses, so you probably don't need to worry about them not making the payment. However, it is worthwhile to at least look at their financial ratings to make sure you're comfortable with their stability. Finally, if you purchase an immediate annuity, you'll want to make sure you have other liquid assets. Once the annuity starts, you can't stop it. Those guaranteed income payments will be nice, but you'll also need to have a safety net to cover unplanned expenses outside of your budget.
A Deferred Indexed Annuity is different from an immediate annuity in the sense that you retain control of the deferred annuity. You own the contract and are able to take withdrawals if you need them. In an indexed annuity, your premium has the potential to earn interest based on the performance of an external index. An index measures how well the stock market, or part of the market, performs. The interest credited on your annuity will be determined by the calculation method used in the fixed indexed annuity and the performance of the index you choose. If the index performs positively or better than your guaranteed minimum interest rate, you'll benefit by receiving more interest on your premium. If the index performs negatively or below your guaranteed minimum interest rate, the insurance company will still pay you the minimum rate, based on the terms of your contract. An indexed annuity can provide additional income options when you add an optional feature known as a guaranteed lifetime withdrawal benefit (GLWB). This feature allows you to take income withdrawals up to a certain percentage. As long as you stay within the allowable withdrawal amount, your withdrawals are guaranteed for life, no matter how long you live or how the contract performs. Most contracts have a liquidity schedule, which you should be aware of prior to purchase. Since the purpose of the Lifetime Income benefit is to provide that income for as long as you live, even if it is to 100 or more, this type of planning is usually considered a long-term commitment. Also, you may be able to leave a death benefit for your heirs using this type of product. For more explanation, read Chapter 5 of Retirement Planning, How to Generate Reliable Income and Avoid the Most Dangerous Games, written by Julie R. Abrams. Available on Amazon or this website.
Smart Strategies for Seniors
Problem: It's always best to start your planning with those things you are certain about. There are some forms of income that are fixed and guaranteed. You know you'll receive the income, and you generally know what the amount will be. This income doesn't fluctuate based on things like stock market volatility or interest rate changes. Knowing your base of Guaranteed Income will give you an idea of whether you have enough money to cover your most urgent expenses. If you're fortunate enough to have a significant amount of Guaranteed Income, you may have a good foundation from which to build. If not, you may need to do some extra planning. The three most common sources of Guaranteed Income are pensions, Social Security, and fixed annuities. Pension benefits are partially protected by the Pension Benefit Guaranty Corp., a federal government agency. Guarantees provided by annuities are the responsibility of the issuing insurance carrier. Social Security faces some financial challenges, but it's likely to still be a reliable source of income for those who are approaching retirement. The Social Security retirement trust fund is projected to run out in 2033, but even after that point, it still should offer benefits. Younger generations may face cuts, but your benefits should still be available.
Solution: Organize all of your statements from your sources of Guaranteed Income. Those could include your pension(s) at your current or past employers. It should also include your Social Security statements and statements for any annuities you may own. Determine the total estimated Guaranteed Income from those sources. If that information isn't easy to find, contact our office. We can review your statements and help you collect this important information.
Problem: When it comes time to choose your pension benefit, you'll be offered several payout options. It may be tempting to take the highest paying one, but that may not be the best choice. In addition to the amount of the payout, you also need to consider what happens to the payout when you pass away. Most pensions offer joint-and-survivor options. Under this plan, your spouse would continue receiving a portion or even all of your pension payment after you pass away. Selecting a joint-life option over a single-life payout will likely lower your benefit amount. However, your spouse may need that income to live if you pass away first. Pension plans may also offer "period certain" options. For example, a payout with a 10-year period certain option would mean you would receive a lower payment, but the payment would be made for a minimum of 10 years. And, even if you pass away within those ten years, your designated beneficiary would receive any leftover payments.
Solution: Get all your options from your employer's human resources department well in advance of your retirement. This will give you sufficient time to review your choices. You can also contact our office to review your options with you, discuss your needs, and help you decide which option is right for you.
Problem: Many Americans underestimate how much they'll spend in retirement. They assume they can get by on a percentage of their current income, like 70 or 80 percent. However, having free time can lead to heavy spending. Once you're retired, your schedule will be free to dine out, go shopping and take up costly hobbies. For example, you may want to travel more in retirement than you did when you were working. Many people also fail to consider medical expenses in retirement. You may feel healthy now, but you're likely to face health issues as you age. If you need in-home care or treatment in a facility, you can expect to pay a significant amount for it.
Solution: Analyze what you spend today so you can better plan for spending in retirement. Break down your spending between required and discretionary expenses. Required expenses are those that you must cover in order to live. They include things like housing, food, and utilities. Discretionary expenses are optional things like travel and dining out. Set up a retirement budget based on your current and past spending. Contact our office to get a free, no-obligation income and expense analysis.
Problem: This is the big question. It will help determine how much additional planning you may need to do. If your Guaranteed Income exceeds your required spending every month, then you at least know that you have enough money coming in to cover basic expenses and maintain a comfortable lifestyle. However, if your guaranteed income is less than your required expenses, you could have some difficulty maintaining your quality of life. That's especially true if you don't have a nest egg in non-guaranteed sources, like a 401(k) or IRA. You may need to implement strategies to help you cover the shortfall.
Solution: Call our office for a free, no-obligation income and expense analysis. We can identify areas where you may be short or where you could face a cash crunch and provide solutions.
Problem: Once you've balanced your Guaranteed Income and required expenses, you can start planning on how best to use and invest the rest of your nest egg. However, you also need to keep saving for the future. You could be retired for several decades, and you'll likely see prices go up during that time due to inflation. You also may need to tap into additional savings to help pay for medical expenses in the future. Retiring doesn't mean you stop saving and investing. On the contrary, it may be more important than ever to have a well-thought-out investment strategy. You have to strike a careful balance between funding today's discretionary expenses and saving for unplanned expenses down the road.
Solution: At Abrams Financial Group, we are knowledgeable and experienced Securities Licensed, Financial professionals. We can help you determine your appropriate risk level and then design an allocation that meets that risk tolerance. We can also set up a distribution schedule to help you tap into your nest egg in a responsible and disciplined manner.
Problem: When you're planning for retirement, you're usually not just planning for yourself. You may have a spouse who will need financial support after you're gone. You may wish to leave money to children or grandchildren. What's the most effective way to do that? Leaving a financial legacy starts with early planning. You need to prioritize your wishes. If supporting your spouse is your primary concern and all other goals are secondary, you need to put that on paper. It's easier to make estate planning decisions when all goals are clearly stated. The problem is many people don't address this because they don't like thinking about their own demise. That's normal, but you have to get past it to accomplish your goals.
Solution: Schedule a time to talk with our office about your legacy goals. We can recommend solutions to make those goals a reality and to take care of your loved ones long after you're gone.
Problem: This scenario may also not be pleasant to think about, but it's a reality for many people. Dementia, Alzheimer's, and other diseases can rob you of your ability to make and communicate your decisions late in life. Although you may not be able to stop the disease, you can take steps to protect your assets, income, and legacy. Problems often arise when there are no clear goals or wishes stated in writing. Various family members may try to make decisions, often with good intentions, but that may go against your wishes. The best steps you can take are to put as much information as possible in writing. Various powers of attorney documents can designate who can act on your behalf if you're unable to make decisions for yourself.
Solution: Talk to your attorney to make sure you have the appropriate documents in place.
Your take-away: A happy and successful retirement starts with sufficient planning. By planning early, you give yourself the opportunity to take action and correct potential issues before they become a reality. You can start the planning process by sitting down for a consultation with our office. We can review your insurance and retirement income needs and show you where more planning may be necessary, as well as refer you to CPAs and attorneys for assistance.
IRA and 401K Planning 3 Rollover Strategies for 401Ks
Roll money out of the old 401K plan into an IRA with no penalties or tax liability. Utilizing the rollover allows more control of your funds. 401K plans may offer limited investment options, whereas, in an IRA, it is possible to select from a wide variety of financial and insurance products. A Traditional IRA works much like a 401K plan. Your money grows tax-deferred until you make withdrawals. If you wait until after age 59½ to withdraw the money, you avoid paying a 10 percent early withdrawal penalty. At age 72, you are required to start making withdrawals. Within an IRA, you can use your money to purchase nearly any type of asset, including stocks, bonds, real estate, gold, international stocks, and more. You can even opt for guarantees and purchase a fixed annuity or keep the money in cash or CDs.
An Annuity is a tailored insurance product that is offered by life insurance companies. It has many of the same tax advantages as a 401K or traditional IRA. Your money grows tax-deferred, and you can take tax penalty-free withdrawals after age 59½. Annuities have other benefits you will not find in a 401(k) or an IRA, such as:
Lifetime Income- Annuities generate streams of income you can not outlive. Immediate annuities convert your savings into an immediate income stream that can last a lifetime and are guaranteed by a life insurance company. A fixed deferred annuity allows your premium the opportunity for growth prior to the Guaranteed Income stream beginning.
Guarantee of Principal- With fixed annuities, your deposit does not go down unless you withdraw money.
Death Benefits- 401K plans and IRAs allow you to pass on your account balance to your beneficiaries. Fixed annuities may have additional death benefits. Some offer protection on your money from losses tied to market downfalls and guarantee your beneficiaries will not receive less than your original account balance. Other annuities offer bonuses to enhance the value of the death benefit. Talk to us about your 401(k) balance at your old employer. We can outline your options and help you make the decisions that are appropriate for you.
You may have the option to transfer the money into your new employer's 401K plan. However, not all employers allow a rollover from a previous employer. This option allows for easier tracking and the continuance of tax-deferred interest potential. However, your 401K investment options may be limited when compared to an IRA, and you may be subject to your new employer rules, management fees, and transaction limits.
Wealth Transfer
Wealth transfer is the transfer of wealth or assets to beneficiaries upon the death of the owner through financial planning strategies that often include wills, estate planning, life insurance, and trusts in a tax-efficient manner.
As you reach retirement age and throughout retirement, the question of transferring wealth to your heirs becomes increasingly important. Regardless of the size of your estate, most people want to know that their assets will move to their beneficiaries easily and at the lowest rate of taxation possible.
There are excellent ways to ensure your wealth transfers to the next generation the way you want it to. Often, the strategies we use involve consulting with accountants and attorneys in addition to our Financial Services firm.
Wealth Transfer Strategies:
Annual gifting allows you to transfer money with no tax consequences for you or the person receiving the gift. Gifting limits change annually. Contact our office for more information.
In a will, you state who you want to inherit your property and name a guardian to care for your young children should something happen to you and the other parent.
If you hold your property in a living trust, your survivors won't have to go through probate court, a time-consuming and expensive process.
Writing out your wishes for health care can protect you if you become unable to make medical decisions for yourself. Health care directives include a health care declaration ("living will") and a power of attorney for health care, which gives someone of your choosing the power to make decisions if you can't. (In some states, these documents are combined into one, called an Advance Health Care Directive.)
With a durable power of attorney for finances, you can give a trusted person authority to handle your finances and property if you become incapacitated and unable to handle your own affairs. The person you name to handle your finances is called your agent or attorney-in-fact (but doesn't have to be an attorney).
Life Insurance can provide a way to create an estate, help pay for taxes at death, and allow you to provide an inheritance that is not taxed at death. Understanding this simple strategy can make a big difference in your wealth transfer goals.