The 60 Second Retirement Plan

While no one plan fits every situation – and you should certainly spend more than a minute formulating an actual plan – the hardest part about anything is getting started.

If this motivates you to take your first step, its worth it.

1) Lower your expenses. Don’t let your upkeep be your downfall. Get rid of debt. If you plan to downsize, do it sooner than later. Don’t bum out about downsizing. Even if you’re rich, “simpler” is better and you’ll likely be happier anyway.

2) Use “guaranteed” income to cover BASIC living expenses. This will keep you from blowing your nest-egg on groceries. There are basically three types of guaranteed income: social security, pensions, and annuities. Figure out your basic bills, and pay as many of them as possible using guaranteed income.

3) Protect against healthcare costs. Attend a Medicare “educational event” and learn how Medicare actually works. Medicare educational events are free and presenters aren’t permitted to try and sell you anything.

4) Plan for “extended” or “long-term” care expenses. Who really loves you and would drop everything they were doing to take care of you? Without a plan this is the person who ends up getting hurt the most! Learn about “asset based” long-term care policies. Underwriting is easier and heirs can get your money back if you don’t use the coverage.

5) Protect against inflation. If you follow STEP 2 and cover your BASIC expenses with guaranteed income, you can leave more of your nest-egg in growth mode. This affords you a critical hedge to protect against inflation over time.

6) Study and focus on fulfillment. It’s not only how long you live, but how well you live. Stay productive. Keep learning. Keep experiencing. Be grateful. Make the most of each day and don’t become a curmudgeon. Set an example and age with grace.

Questions, thoughts, comments? You can reach me directly here or by posting a comment below.

Here’s wishing you a secure and happy retirement!

Are you nervous about relying on the stock market?

Many people who lived through the 2008/2009 stock market bubble are still very nervous about the future of the stock market. Many are especially nervous about relying on the market as a means of reliable support during their retirement years.

As well they should be.

Most people aren’t aware that there are alternatives to Wall Street when it comes to achieving income security during retirement.

I have been doing some writing recently about “pooled income” – an idea that has existed in various forms for over 2,000 years – and how this resource may prove to be one of the biggest salvations for the Baby Boomer generation.

I looked up some numbers today to run a quick comparison between various alternatives for generating income at current rates – money market deposits, long term treasuries, and an immediate life annuity.

For this comparison, I assumed a male age 65 with $500,000 to allocate.

Here is how the numbers came out,

  • Money Market. Money market rates today (4-25-16 / www.bankrate.com) were paying between 0.85% and 1.00%. Assuming a 1% return on a $500,000 allocation, yields an income of $5,000/year.
  • 30 Year Treasury Bonds. The  yield on 30 Year U.S. Treasuries today (4-25-16 / data.cnbc.com) was hovering around 2.72%. Assuming a 2.72% return on a $500,000 allocation, yields an income of $13,610/year.
  • Immediate Life Annuity. I visited the CNN Money Retirement Calculator and ran a $500,000 lump sum for a 65 year old male for an immediate life annuity in my area. The result came back an estimated $2,744 per month for an income of $32,928/year.

Yearly income $500,000 allocation

These numbers change practically by the minute, but the general conclusion is clear. The annuity far exceeds the income generating capacity of the other alternatives for the same allocated amount.

Why does the annuity yield so much more income?

Because it is a pooled income product. Pooled income is the primary engine behind entities as commonplace as Social Security and defined benefit pension plans.

To learn more about how pooled income products work, click here.

Baby Boomers throughout their lifetimes have been barraged by the financial industry and the media that the stock market as the be-all and end-all for achieving retirement security, but there are other alternatives.

Click here for an easy way to calculate the income amount you may need in retirement and to learn more about how to generate that income.

To learn more about or discuss the suitability of various income alternatives for your situation, you are welcome to contact me by email or through my Cincinnati, OH insurance agency, McCarthy Stevenot Agency, Inc.

So, what do you think?

  • Are you worried about the markets and how they may affect your financial security in retirement?
  • Have the past few bubbles and bursts impacted your faith in the market?
  • Do you think the market is likely to become more or less reliable in the coming years?
  • Are you surprised at the difference in income amounts in the comparison above?

Pooled Income: The secret to getting more out of your retirement savings

One of the hardest things for people to do in retirement is translate nest-egg savings into reliable income that lasts. A way to do so – and generally get back more income per dollar compared to other alternatives – is through “pooled income.”

Though entities as commonplace Social Security and defined-benefit pension plans utilize pooled income approaches, few are aware of how such arrangements actually function.

Baby Boomers – especially those with 401(k)s and no traditional pension to fall back on – can benefit tremendously from a better understanding of the benefits of pooled income.

Below, from the writings of economist Moshe Milevsky, PhD., is one of the best – and most entertaining – descriptions I have ever read on how pooled income works.

The 95 Year Old Bridge Club

“My 95-year old grandmother loves playing bridge with her four best friends on Sunday every few months. Coincidentally, the five of them are exactly 95-years old, are quite healthy and have actually been retired – and playing bridge – for 30 years. Recently this game has gotten somewhat tiresome and my grandmother has decided to juice-up their activities. Last time they met, she proposed that they each take $100 out of their purse wallets and place the money on the kitchen table. “Whoever survives to the end of the year, gets to split the $500…” she said. “And, if you don’t make it, you forfeit the money…Oh yeah, don’t tell the kids.”

Yes, this is an odd gamble, but you will see my point in a moment. In fact, they all thought it was an interesting idea and agreed, but felt it was risky to keep $500 on the kitchen table for a whole year. So, the five of them decided to put the money in a local bank’s one-year certificate of deposit paying 5% interest for the year.

So what will happen next year? According to statistics compiled by actuaries at the U.S. Social Security administration, there is a 20% chance that any given member of my grandmother’s bridge club will pass-on to the next world during the next year. This, in turn, implies an 80% chance of survival. And, while virtually anything can happen during the next 12 months of waiting – actually, there are 120 combinations, believe it or not — the odds imply that an average four 96-year olds will survive to split the $525 pot at year-end. (I sure hope
grandma is one of them.)

Note that each survivor will get $131.25 as their total return on the original investment of $100. The 31.25% investment return contains 5% of the bank’s money and a healthy 26.25% of “mortality credits”. These credits represent the capital and interest “lost” by the deceased and “gained” by the survivors.

The catch, of course, is that the average non-survivor forfeited their claim to the funds. And, while the beneficiary’s of the non-survivor might be frustrated with the outcome, the survivors get a superior investment return. More importantly, they ALL get to manage their lifetime income risk in advance, without having to worry about what the future will bring.”

Click to view the original paper, “Grandma’s Longevity Insurance,” from Moshe Milevsky, PhD.

Important notes on the story:

In a real pooled income arrangement, the people don’t get to keep the money at the end. Instead, funds are allocated to assure that income for the remaining participants persists.

Those who live the longest do reap the greatest rewards. But, that’s really the point. People have the choice to cling to the funds they have and risk running out of money at later ages, or, let go, “jump in the pool,” and rest assured they will always have a guaranteed income no matter how long they end up living.

Few argue that individuals should put all of their funds into pooled income products. The key is to cover basic living expenses – food, shelter, utilities, everyday expenditures. Therein lies security. Once basic expenses are covered, more traditional investment alternatives would be preferred due to their liquidity, growth potential, and suitability for inheritance planning.

Relative to the issue of inheritance, it is useful to recall the warning flight attendants give to airline travelers, “Put the oxygen mask on yourself, before putting it on your child.” Similar logic applies to retirement funding, “Make sure to cover your basic income security, before worrying about leaving money to your kids.” (One idea is to leave kids your “stuff” instead – house, physical assets, etc.)

Mentioned in the story above is the concept of “mortality credits.” Mortality credits are what create the magic and give pooled income arrangements – including Social Security, pension plans, and individual annuities – the ability promise more long-term income to participants than other comparable mechanisms.

Assuming proper funding, mortality credits allow for the assets of pooled funds to be invested in highly safe instruments, such as intermediate and long-term bonds, and still deliver superior results.

Arguably, mortality credits may afford pooled funds the ability to take on a bit more risk to achieve their objectives. In grandma’s story above, if the group had put the $500 into a hot growth stock and lost 20%, the survivors would have still each gotten their money back.

Finally, securing basic living expenses with pooled income can give individuals more freedom to pursue higher investment returns with their remaining funds. This happens because a person’s “base” income is safely separated from his or her overall investment risk.

In summary, here are several major benefits provided by pooled income mechanisms,

  • They serve as a form of insurance to cover basic expenses in retirement.
  • They generally provide more retirement income per dollar allocated.
  • They protect against the risk of living too long and outliving retirement funds.
  • They insulate retirees from the ups and downs in the market.
  • They allow greater freedom to pursue higher returns with remaining retirement funds.
  • They provide a simplified means of translating retirement savings into steady, reliable income.

If you would like to learn more about the suitability of pooled income products for your situation, you are welcome to contact me by email or through my Cincinnati, OH based insurance agency, McCarthy Stevenot Agency, Inc.

Bonus content: Use this simple method to calculate how much basic income you may need in retirement.

Amazon links to other works by Moshe Milevsky, PhD. (Purchasing books through these “sponsored” links help defray the cost of this website. Thank you!)

The secret to saving the Baby Boomers

By 2030, the last of the Baby Boomers will reach retirement age. At that time, nearly one in five Americans will be over the age of 65.

Many experts predict a retirement crisis will be arriving shortly thereafter.

The issue here is money…

  • Will Baby Boomers have saved enough?
  • Will the money they have saved last?
  • What will be the status of social safety nets like Social Security and Medicare?
  • Will the “do-it-yourself” 401(k) retirement model succeed in generating reliable income for such a sizeable retired population?
  • Will the possibility of market crashes, bubbles, and corrections complicate matters even more?

The solution for saving the Boomers

The solution for saving and assuring the future security of Boomers is income.

Especially guaranteed income that is immune to market turbulence, adjusts for inflation, and lasts for a lifetime no matter how long a person lives.

I’m not talking here about income to send people on exotic vacations or take trips around the world.

I’m talking about basic income that affords a person the ability to live with dignity.

  • This means income to buy food when you are hungry, to keep you warm when it’s cold, to help pay for medicine, everyday necessities, and keep a roof over your head.
  • This means income that will be there regardless of the future – no matter how long you live and no matter what your physical condition.
  • This means income to provide a backstop, a safety net, and insurance.
  • This means income powerful enough to say to a spouse with certainty, “I love you and even though one day I may be gone, this money will be here for you no matter what the future may bring.”

If a person lacks such basic income, it really can be a crisis.

Heartbreak. Destitution. Poverty. Hunger.

So, how does a person obtain the necessary income to cover his or her basic needs?

There are generally two sources for generating income in retirement, pooled income and investment income.

Pooled Income versus Investment Income

Pooled income should be used as insurance to protect and guarantee income needed for basic living expenses. After that, investment income should take the lead covering additional expenses and legacy planning.

Differences between pooled income and investment income.

Pooled Income

  • Pooled income – while still expensive – is the cheapest way to create lasting income and it provides the greatest guarantees for future security.
  • Money is placed in a shared “pool” and funds are withdrawn to provide income for participants.
  • Pools are typically administered by large insurance companies, pension plans, or government entities.
  • Income is usually guaranteed for life.
  • Depending on the source, cost of living adjustments may or may not be provided.
  • Except for survivor benefits, pooled income provides no inheritance for heirs.
  • Funds are illiquid – except for the checks a person receives every month.
  • For those living the longest, pooled income generates an enhanced yield that is virtually impossible to beat using conventionally traded instruments.
  • Examples of pooled income include Social Security (were it funded properly), traditional “defined benefit” pension plans, and annuities.

Investment Income

  • Investment income is generated by investment funds.
  • Investment funds tend to be more liquid and provide a greater appearance of control.
  • Generally, investment income requires a larger starting balance (when compared with pooled income) to generate the same sustainable targeted income amount.
  • May fluctuate based on the ups and downs of the markets.
  • Generally provides no guarantees.
  • Principle can suffer from market turbulence and funds can be depleted.
  • Is compatible with leaving inheritances, assuming funds last.
  • Allows for greater liquidity to make larger, immediate expenditures.
  • Funds may be invested in a wide array of investment alternatives.
  • Examples of investment income sources include IRAs, personal investment accounts and 401(k) type savings plans.

My intent is not to argue that either type of income is necessarily better than the other.

Both income types serve a valuable purpose depending on the need.

I am generally as opposed to relying on investment income to cover basic expenses as I am for using pooled income to finance luxuries.

The goal is to align the income types so as to provide the highest possibility for future success.

Covering the basics

We can help save the Baby Boomers by encouraging them where possible to seek guaranteed pooled income to cover their basic income needs in retirement.

The more basic income Boomers obtain from such sources, the safer they will be from running out of income and facing serious financial hardship in their senior years.

Have you ever wondered how much money you will need to cover basic living expenses in retirement? Click here for an easy way to calculate the income amount you may need.

So what do you think?

  • How well do you believe the stock market will serve to support the income needs of Boomers during their retirement years?
  • If you knew you had enough guaranteed income to support your income needs in retirement, would it give you peace of mind?
  • What do you think of the idea of forgoing inheritance for kids if it means gaining income security for your retirement?
  • What steps could you take to make your living expenses in retirement more affordable?

How long will you live?

Everyone hopes for a long and happy life, but did you know economists actually consider living too long to be a risk?

They even have a name for it, “longevity risk.”

It is the condition of living so long that you end up outliving your money.

Find out your average life expectancy using Social Security’s “Life Expectancy Calculator”.

Because no one knows for sure how long he or she (or a spouse) will live, the issue of life expectancy can complicate retirement planning. Think of it like trying to plan a dinner party without knowing how many guests are going to show up.

The good news is, with a few simple planning steps, most of the worries surrounding this issue can be solved.

Facts about the “risk” of living too long,

  • People are living longer now than ever. Improvements in medical technology, disease prevention, treatment, and management have lead to longer and longer life spans.
  • How long can a person live? The answer is really unknown. So far, the oldest living person on record was Jeanne Calment of Arles, France. Jeanne died in 1997 at the age of 122.
  • What is the average life expectancy for U.S. retirees? If you are 65 today, average life expectancy is 84.3 for a man and 86.6 for a woman. Note…these are only averages, so half of the population will live even longer!
  • Marriage is a factor. Married people retiring today have about a 50% chance that at least one member of the couple will live to age 92.
  • Women are more at risk. Because women live substantially longer than men, they are much more likely to become impoverished in older ages.
  • Your precise risk is unknown. An individual person’s exact longevity risk is difficult to determine because it is derived from a mix of factors including, available retirement funds, rates of return on future investments (or market losses), retirement spending rate, inflation, future medical expenses, family health history, and lifespan.

How to solve the problem of longevity risk?

The most important factor for overcoming longevity risk is having enough INCOME to pay your basic living expenses in retirement – especially guaranteed-for-life income that lasts no matter how you live and adjusts for inflation.

For most retirees, guaranteed life income comes from three major sources:

  • Social Security
  • A company (or government) pension
  • Life annuities

Click here for a simple way to calculate how much income you need in retirement and learn FIVE ways to make the cost of retirement more affordable.

Often, people end up combining several sources of income to achieve their retirement goals. The idea isn’t necessarily to have all of your income come from guaranteed sources, but enough to cover your basic living expenses and give you peace of mind. Studies show that retirees with more guaranteed income have less stress and more enjoyable retirements.

So what do you think?

Have you ever thought living too long could be a risk? Do you know of anyone who has outlived their money? What about the issue of women being more at risk? As a husband and a father, I do not want to leave the risk of my wife suffering poverty in very senior age to chance.

Feel free to email me comments or questions. You can also post comments below.

Why income beats savings in retirement

Imagine yourself far in the future. Yesterday, you celebrated your 82nd birthday! It was an enjoyable day spent with family and friends followed by a relaxing dinner with cake, ice cream, and many happy memories.

But this morning you awoke to some troubling news…

When you clicked on your favorite news app, you learned that an overnight far-eastern currency concern has sent U.S. markets into a tailspin.

As the next several days go by, market conditions rapidly deteriorate. The damage even begins to spread to other sectors. Both real estate and bonds start taking substantial hits.

Logging into your online brokerage account, you watch your account balances dropping more and more each day. Years and years of hard-earned savings are vanishing before your eyes.

You ask yourself, “Is this ever going to end? Should I be selling? Should I be staying put? Will my retirement funds be able to survive this latest ‘correction’? If not, how am I going to pay my future bills?”

This story is just a sample of the kind of worry that can arise when long-term retirement income is based solely on invested savings and systematic withdrawals from savings.

Do you currently have only a 401k plan and no guaranteed company pension?

Then, someday, this could be you…

The good news is, however, with a few simple planning steps, there are ways you can help reduce or even eliminate many of the above concerns. In fact, it can even be possible to establish a foundation for a reliable and worry-free retirement income.

The key to doing so is locking down enough guaranteed retirement income to cover your basic future expenses.

Guaranteed income is money that will be paid to you no matter what happens in future markets and no matter how long you end up living. Guaranteed income can be derived from a variety of sources including a combination of Social Security, a company or union pension, and life income annuities.

How much retirement income will you need?

Many planners point toward a “target” for retirement income that is equal to roughly 70% of a person’s pre-retirement income. In general, the more “base income” a person has from guaranteed sources, the easier time they will have meeting ongoing expenses in retirement. Studies show that individuals with more guaranteed income during retirement are also known to be happier and have less stress in their senior years.

How to create a successful retirement income plan

The fundamental elements of building a solid income plan for retirement are as follows;

  1. Reduce your long-term retirement living expenses where possible (downsize, simplify your life, pay off any mortgages or consumer debt).
  2. Establish an emergency fund for short-term cash needs (set aside the equivalent of six months to a year of income in an easily accessible FDIC-insured bank account).
  3. Calculate your NEEDED retirement income using the 70% rule or other similar method.
    (pre-retirement income = $100,000. 70% of $100,000 = $70,000)
  4. Add up ALL the income you will have from GUARANTEED sources such as Social Security, pensions, and life annuities.
    ($46,000 Social Security + $0 company pension + $0 annuity income = $46,000)
  5. Subtract your GUARANTEED income from your NEEDED income. This is your income “gap.” ($70,000 – $46,000 = $24,000 income gap)
  6. Click here to learn more about ways to fill your income gap!

Once funding for your basic income needs is set, you can think about allocating your remaining assets for future savings, special purchases, investments, and legacy planning (i.e. money that you plan to leave to kids, grandchildren, or charity).

For most people, covering basic retirement living expenses through guaranteed income will be better than relying on savings. Guaranteed income takes uncertainty out of affording your monthly bills and removes stress about what will happen to your savings in future markets. Guaranteed income also simplifies planning and assures you will receive a “check” each month no matter how long you our your spouse may live.

When added together, the benefits of guaranteed income help lead to a happier, more secure, and more relaxing retirement.

So, what about you? Do you worry about how to create income for your retirement? Do the potential ups and downs of the market bother you? If so, what is your plan to solve for this problem?

Let me know your thoughts by email or in the comments below.