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Joe Lucey

Retirement: Spending vs. Income Planning

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One common rule of thumb for retirement savings is to replace 80 percent of your pre-retirement income — or an even higher percentage. But what if you currently spend more than you earn? Or what if you spend much less than you earn? Perhaps a better measure would be to base your retirement income on your current spending habits. After all, income isn’t always a measure of a person’s lifestyle; spending habits often provide more clarity on the lifestyle we live.

In retirement, you will likely spend less money on things like housing, clothes, commuting and children. On the other hand, you may spend more money on health care and household assistance. Therefore, it may make sense to plan on having enough income to cover the same level of spending as your pre-retirement years.

According to a survey by the Employee Benefit Research Institute, about 38 percent of retirees report they actually spend more in retirement than they did while they were working. Twenty-one percent say they spend less, while 38 percent say they spend the same amount.

If you go by the results of this survey, more than half of pre-retirees need to plan for at least as much income as they spend now — which may be a challenge for those who already spend more than they earn. Regardless of how much you earn now, you may want to consider basing your retirement income plan on how much you currently spend, rather than how much you currently earn.

 

The content provided here is designed to provide general information on the subjects covered. It is not, however, intended to provide specific legal or tax advice.  Contact us at info@securedretirements.com or call us at (952) 460­-3260 to schedule a time to discuss your financial situation and the potential role of investments in your financial strategy.

The Old-School Stool

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The proverbial “three-legged stool” of retirement funding traditionally comprised Social Security, a company pension and personal savings, but that stool has been wobbly for quite some time. In fact, the traditional pension has been replaced largely by employer-sponsored 401(k) plans. This development firmly places the responsibility of two of the three stool legs on individual savings.

In addition, this old-school stool has not kept up with one of the greatest achievements of the last 50 years: longer life expectancy. The Social Security program hasn’t kept up; current estimates project funding will be able to pay full benefits only until 2035. Presently, there are various solutions proposed for shoring up funding for Social Security, including eliminating the income tax limit ($127,200 in 2017) and increasing the full retirement age to 69.

Pensions are experiencing challenges as well. Despite the efforts of the Pension Protection Act (PPA) passed in 2006, this leg of the stool is still on uneven ground and the funding relief it does provide is scheduled to end in 2020. According to one recent report, state and local pension funds in the U.S. are facing a $1.5 trillion shortfall in worker benefits.

Company-sponsored retirement plans and individual savings haven’t exactly covered the gap vacated by pensions, either. A recent survey found that only 69 percent of workers expect to receive retirement income from 401(k)s, 403(b)s and IRAs. In fact, only 16 percent of workers strongly agree that they are building a retirement “nest egg” substantial enough to support their retirement needs, and 45 percent of baby boomers expect a decrease in their standard of living when they retire.

The outlook may appear dismal, but remember that these are national numbers. What’s most important are your own numbers, including your personal savings rate, the growth potential of your investment portfolio and other retirement assets, and your ability to work longer to help save more and increase your Social Security benefits. We’re happy to sit down with you to review your current financial situation and help create strategies utilizing a variety of investment and insurance products that can help you work toward your financial goals.

Many of today’s retirement experts recommend what’s now considered the “fourth leg” of that retirement stool: continued employment. For those who can, work offers the opportunity to earn more, save more and allow retirement assets to potentially grow more. Unfortunately, this fourth leg may be more difficult for people who work in physically demanding jobs, as health issues and demands on an older body can impede continuing their trade.

In fact, one research group estimates that 54 percent of lower-educated Americans are more likely to face an income gap even if they retire when planned, compared to 36 percent of the highest-educated group.

 

The content provided here is designed to provide general information on the subjects covered. It is not, however, intended to provide specific legal or tax advice.  Contact us at info@securedretirements.com or call us at (952) 460­-3260 to schedule a time to discuss your financial situation and the potential role of investments in your financial strategy.

Planning for Tax-Efficient Retirement Income

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If you expect to be in a high tax bracket in retirement, you may consider allocating your retirement assets in a variety of different types of financial products to help reduce your tax liability.

The growth potential of tax-deferred annuities may be appealing to those who have invested in safe, low-yielding strategies and are concerned about outliving their retirement savings. While contributions to a nonqualified annuity are not tax deductible, earnings accrue tax deferred. When retirees begin taking income from the annuity, they are taxed only on the interest portion of each payout. In contrast, distributions from a traditional IRA or 401(k) plan will be fully taxed since all contributions were made with pre-tax dollars.

Depending on which type of annuity is purchased, individuals may have a wide range of interest crediting options to select from. Also note that when the owner chooses to annuitize income payouts, he or she will receive a guaranteed (by the insurer) retirement income stream. If a lifetime income option is chosen, guaranteed payouts will be made based on life expectancy.

Another tax-efficient option for retirement and legacy planning is whole life insurance. Some policies enable the owner to build up cash value over time which can be tapped for emergency funds or to supplement income, generally through the use of policy loans. The cash value may even be used to pay the policy’s premiums should funds begin diminishing in later retirement years. Please note that withdrawals or policy loans of any type may reduce available cash values and death benefits.

One of the benefits of life insurance is that it can convert taxable dollars into a much larger tax-free inheritance for beneficiaries. So rather than living conservatively in retirement for the purpose of protecting an estate for beneficiaries, an individual can earmark a certain portion of income toward a whole life policy and know exactly how much their beneficiaries will receive upon death.

Individuals may wish to consider how to reduce their tax liability in retirement by utilizing both traditional qualified retirement accounts, life insurance and/or a nonqualified annuity for tax diversification. Consult with your financial advisor and tax advisor about creating a financial strategy that diversifies both the types of accounts you hold as well as the assets you own.

Life insurance policies are contracts between you and an insurance company. Annuities are insurance products that may be subject to fees, surrender charges and holding periods which vary by company. Annuities are not a deposit of nor are they insured by any bank, the FDIC, NCUA, or by any federal government agency. Annuities are designed for retirement or other long-term needs. Guarantees and protections provided by insurance products including annuities are backed by the financial strength and claims-paying ability of the issuing insurer.

The content provided here is designed to provide general information on the subjects covered. It is not, however, intended to provide specific legal or tax advice. Contact us at info@securedretirements.com or call us at (952) 460­-3260 to schedule a time to discuss your financial situation and the potential role of investments in your financial strategy.

The 411 on Fake News

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As much as we love to joke, “If you read it on the internet, it must be true!”, nearly everyone has fallen prey to some type of fake news headline. Even if you discover the information in an article is suspect after reading a couple paragraphs, your click alone may have been enough for the website to receive compensation.

Fake news has become big business and can be quite sophisticated, making it more difficult to discern false stories from legitimate news. Bear in mind that the website of a legitimate news organization will provide information about its mission, staff members, physical location and a means of contact. However, even fake websites may have names that appear legitimate, such as Associated Media Coverage, abcnews.com.co, WTOE 5 News or the Boston Tribune.

Even legitimate mainstream news coverage can be misleading at times. Some publications are prone to cover stories and/or angles geared to a particular audience, so even though the news may not be “fake,” it may present only part of the story. Be aware that the more times you click on questionable headlines you think could be real, the more fake news stories with similar content may be directed your way.

The following are tips to help stop today’s fake news epidemic:

  • Read beyond the headline. Sometimes headlines stick in our heads and we repeat them or share them on social media. However, if you read the article before sharing, you may discover the information is iffy.
  • Be aware that fake news articles tend to have no author or, worse yet, a fake author with bogus credentials.
  • Check the date. Many stories get shared that seem timely but happened in the past.
  • Stories that feature excessive exclamation points, capital letters and misspellings are not likely to be legitimate.
  • Whenever you have doubts, Snopes.com and FactCheck.org are legitimate websites that expose fake news, so you can check out suspicious news sources.

Avoiding Biased Decision Making

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When you hear something repeated enough times, doubts may start to slip away, and eventually it’s accepted as a fact. Believing the things that are imbedded in our psyche because we’ve heard them before is known as an “availability bias.”

This may partially explain why blue-chip stocks are popular, as more investors tend to be interested in known entities they have heard about hundreds of times before. Of course, it’s important to ensure you can trust the source from which you receive information, investment or otherwise.

Identifying a wide range of investor biases is part of the research emanating from the growing field of behavioral finance. These insights are designed to help each of us understand why we make the decisions we do, particularly when we behave irrationally despite having reliable information in hand to make a rational choice. Behavioral finance delves into how we process information using flawed filters of emotion, memory and even our personal disposition to bias our decisions.

Availability bias is just one of many factors that can impact investor decisions. Another is “recency bias,” an inclination to use our recent experience as a foundation for predicting what will happen. For example, even though we intellectually understand that securities prices rise and fall in market cycles, sometimes we get so caught up in the fact that a stock “always delivers” that we’re surprised when it takes a downturn.

“Familiarity bias” is when we stick with what we know and avoid what we don’t. In life, that may simply lead to boredom, but when investing, it may have more significant implications. It’s like saying we already possess all the knowledge we’ll ever need.

Bias can even pertain to when retirees decide to begin drawing Social Security benefits. The trend is to start before full retirement age. Some people may need to supplement their income at that time, but others instinctively believe that if they don’t start taking benefits early, they’re losing money (“loss-aversion bias”).

The truth is, once you begin taking benefits, you “lock in” to that level permanently. If you begin drawing benefits at age 62, you’ll receive 25 percent less each month than your full benefit at age 66.

As a financial advisor, we work to establish trust with our clients.  It’s important to consider any investment within the context of your own goals, risk tolerance, investment timeline and the composition of your overall portfolio. We will only provide investment advisory services after we have assessed your financial situation. If you’re interested in a comprehensive review of this nature, we’d be happy to schedule a time to meet with you.

Our firm is not affiliated with the Social Security Administration or any governmental agency. The content provided here is designed to provide general information on the subjects covered. It is not, however, intended to provide specific legal or tax advice. Contact us at info@securedretirements.com or call us at (952) 460­-3260 to schedule a time to discuss your financial situation and the potential role of investments in your financial strategy.

Euro Update: What to Potentially Expect in 2017

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The United States’ recovery following the recession may feel slow, but it has outperformed other major markets worldwide.

Europe, home to many developed nations, has seen dismal growth that is not expected to improve anytime soon. The Conference Board, a global, independent business membership and research association, projects only 1.4 percent growth in 2017, down from its 1.7 percent rate in 2016.

Governments in developed countries are in a state of transformation and reform at the will of working-class voters. Dissatisfaction in Great Britain led to a vote to leave the European Union last summer, followed by a “drain-the-swamp” sentiment in the U.S. presidential election and finally, at the end of the year, Italy voted against a referendum for constitutional reforms that may have helped its failing banking system.

As a general rule in any country, a state of uncertainty and lack of confidence — whether caused by the economy, financial markets, civil unrest or political upheaval — tends to quash growth. Companies may put expansion and investment plans on hold, which further stunts job and wage growth. Unfortunately, the longer this state of uncertainty persists, the more profound impact it can have on an economy.

There are several key issues that will likely impact European countries this year. One is the voter movement against trade deals. Global free trade may offer lower-cost labor options and lower consumer prices, but at the price of job losses to workers in developed nations. The European zone in particular has enjoyed a prolonged period of open borders and a positive trade balance marked by more exports than imports. However, the challenge moving forward will be how to stimulate growth through globalization without further disenfranchising domestic populations.

The first big economic test for incoming politicians may come in March, when Britain begins its extrication from the EU. This will be accompanied by a series of political elections which could further serve to destabilize the region, including the Netherlands (March), France (May) and Germany (September).

The euro is losing value compared to the U.S. dollar, which one analyst believes could help Europe’s exports become more competitive and stimulate growth in the region. However, rising interest rates in the U.S. could lead to instability in emerging markets and a drop off in overall global demand.