Paul Ferraresi

With your 401k /IRA and personal account values being down it seems that no one wants to look up.

The sun will shine again. Trust me. Most people do not want to examine the track they are on for retirement. It is too painful to face the reality. They are acting like an ostrich and putting their head in the sand.

Look…if you are retiring in 10 years, then, whether you take active, positive steps now, or, avoid looking at the situation…you will still hit retirement in 10 years. The train does not stop for you.

I suggest looking at the situation in a healthy approach. I have suggested in this blog a site that is simple, yet effective and I feel it is worth another mention. I have worked with National Life Group and they do an excellent job for all my clients. Their retirement site allows you to do many calculations. Visit their site at: http://experienceretirement.com/.

It is easy to navigate and very helpful. As always, if you have questions or need assistance contact me at (713) 871-5919 or paul@fgmci.com

I am constantly asked… how much do I need for retirement? There are rules of thumb all the way up to sophisticated models that we use to find the correct amount.

Obviously, there are some basic information that one must understand. When one retires, they are usually at their lifetime’s highest income. Most recent studies (and a rule I have always used that is successful) show that you will need about 90% of your preretirement income during retirement.

Some people balk at this claiming they will only need 50% of their income as the kids have moved on, mortgage is paid off and they won’t need to commute. Well, how many times in your life have you already retired? You see what experience do you have? First off, remember the income and lifestyle you were living say 20 or 30 years ago? Could you go back to that lower income and lifestyle? More importantly… would you? Next, whenever you have paid off a debt (car or credit card loan), what happens to that money? Have you really saved it or do unusual expenses always eat it up? What do you think happens when your mortgage gets paid off? The same thing!!! One other item is your health expenses and premiums skyrocket during retirement to easily 8-10 times what you currently are paying (since your employer usually subsidizes a large portion of your health premiums).

With that out of the way, now answer me… how long will you live after retirement? Seriously!! That has a huge effect on the number needed. Hmmm. You have life insurance to protect if you die early, but, we are trying to plan for you not dying early.
Say your preretirement income is $50,000 per year. Using the 90% factor, then, you will need $45,000 in the first year of retirement. (We will cover the inflation factor very soon). Now the sad part is that the average baby boomer has about $50,000 saved for retirement. Ouch!

The sophisticated studies show the “safe” withdrawal rate from your retirement account (savings) should be about 4.5% for the first year (and then increased for inflation each year). This will assure an almost certain likelihood the portfolio will be able to provide income for 30 years. This assumes a portfolio mix of 60% stocks and 40% bonds. So, to fund a first year income stream of $45,000 with a 4.5% withdrawal rate, you will need a $1,000,000 portfolio at age 65.

Okay, you now have a simple formula to extrapolate how much more or less you need based on your current income.
If you need some ideas on how to build up your retirement nest egg, please contact us at founders@goundersgroupinc.net. For additional reading on this, go to the Kitces report at www.Kitces.com.

As of this writing the stock market has made a major recovery from the March 2009 low.

Many people wanted to “get out” of their retirement plans because they had dropped so much in value. That is the wrong reason to get out of your retirement plans early. I have written many times in this blog that IRA / 401K and other qualified plans are “time bombs.” You will end up paying substantially more in taxes when you retire than the amount you saved in taxes while contributing (that is, the extra amount in taxes you pay in retirement is almost 10 times the amount of taxes you saved while contributing).

I am asking you to think outside the box. Although most retirement plans have improved in value by 25-30% over the past few months they are still underwater in value from their highs 18 months ago.

Consider cashing out of these “time bombs” now, pay the tax now, and invest the monies into:
(1) A program that will generate lower capital gains tax in the future. With the massive stimulus package spending EVERYONE will be paying much higher taxes in the future. So to avoid this why not pay your taxes in the future at a lower capital gains tax rate than the higher ordinary income tax rate?

(2) A better approach….cash out of your retirement plans and, pay the tax now. Then invest in a program that will grow tax free, you can have access to the money tax free even before age 59 ½ without any tax or penalties, and when you die, the money transfers tax free.

Folks this is a layup with a ladder. Need some more direction on this? Email us at Darlyn@fgmci.com or call (713) 871-5919. By all means subscribe to our new blog www.WealthyFutureblog.com to learn more about this topic and other wealth building programs.

The reason for the increase in annuity products is multifaceted. Not only is a drove of baby boomers set to retire, many of them without adequate retirement assets, the current crop of boomers are retiring at a time when investment markets are producing few gains and many losses. Enter annuities, which a recent Wharton Financial Institutions Center study co-sponsored by New York Life Insurance Co. found could produce a lifelong cash stream for investors at a cost that is as much as 40% less than a traditional portfolio of stocks, bonds and cash. That means an investor at age 65 can guarantee that same income with $600,000 that a neighbor may need $1 million to produce with stocks, bonds and cash – and without the guarantee. For actual payouts read on.
Income annuities can also be critical to mitigate the risks of longevity, says the study’s co-author David F. Babbel, an insurance and risk-management professor at the Wharton School. While “on average” half the population lives until 85, half of those who make it past age 65 will live beyond the age of 85. And all of those people who live past 85 have a chance to live past 100, and they are going to need income, Babbel says. That is where sound income planning, especially the concept of income annuities with longevity features, can be so beneficial, he adds. Since they guarantee income for life, the investor sidesteps the risk of unfortunate investment decisions, poor performing markets and running out of money.
More food for thought.

I came across an article in the November/December 2008 issue of NEFE Digest (a publication for professional financial educators) and I could not resist sharing it. It holds many of the concepts that I have taught you in this blog. The article was written by Brent A. Neiser, CFP. He is director of Strategic Programs and Alliances and chief organizer of NEFE’s Retirement Income Decumulation Think Tank. Now, although it is being written to us as financial educators, I know you will find it useful as you look over my shoulder. Enjoy and hopefully you will get a few subtle “aha’s.”

Myths of Retirement

Ever have someone tell you that after working hard for the last 40+ years they are “finally ready to retire?” Retire on WHAT, you think. They have virtually no investments, little savings, maybe a house with limited equity, and not much else.

We in the financial education community have to explode the many myths associated with living in retirement and on social security. Astoundingly, many Americans still believe that they can somehow live their life in retirement by relying almost exclusively on that monthly government check. Social Security was designed to be a supplemental income source, not the whole retirement package.

At least 50 million families are currently “undersaved” and racing headfirst towards retirement. Many soon-to-be retirees often don’t think about (or are too overwhelmed to think about) how they are going to pay for retirement. And once they actually get there, they realize they have not adequately calculated the cost of living through retirement. Alarmingly, they often overestimate how long their personal savings will last once they retire and begin spending their limited nest egg.

Too many people think of 65 (or even earlier) as the so-called “magic number” when they will stop working. Quite possible they spent their life working at a job they didn’t like, but it paid the bills. Even worse? A life spent at a job they didn’t like that didn’t pay the bills.

But absent significant health issues, there is no particular reason to retire at 65. All of us have significantly more years beyond that arbitrary date in which we can have vibrant, intellectually stimulating, and challenging lives. Regardless, many stop working, more than likely too early. Doing that and claiming Social Security before full retirement age will reduce lifetime inflation-adjusted earnings by up to a third.

So, how do we motivate people to work longer and save more? It is not an easy sell. Since the 1950s, when the retirement age was roughly 68, we’ve been marching steadily towards a younger retirement age. Right now, it is about 63 according to the Bureau of Labor Statistics.

But working longer and planning too far into the future is counterintuitive to most of us. We’ve been the target of a lifetime of advertising telling us that if you want it, buy it now on credit and worry about tomorrow- tomorrow.

Regardless, of whether someone is in their forties, fifties, or beyond, we as financial educators need to affirm that building up large retirement savings is not a luxury but a necessity. Soon-to-be retirees need to understand not only to save for the “fun” part of retirement, but also for the unavoidable. Medicare co-pays will sap their accumulated savings as they grow older. Inflation will not stop just because they have gone into retirement. As they age, just about everything will cost more, even as they draw down their accumulated savings and investments.

There are some solutions. By retiring later, people can avoid drawing down what little savings they have accumulated and actually can continue to add to their savings. In many cases, they’ll also be able to keep their employer sponsored health insurance.

An added bonus of working past 65: more time to pay off any high-interest outstanding debts, like credit cards, car loans, or personal lines of credit. The goal is to go into retirement debt-free or close to it.

As professionals, it is imperative we provide more education and retirement product options for those in or nearing the retirement phase of their life. Obviously, we also must provide comparable direction and assistance for those in the savings and accumulation phase.

In particular, we must get soon-to-be retirees to talk about annuitizing at least a part of a lump sum distribution from an IRA or 401(k) to provide a stable, secure, and predictable income. But, would-be buyers need to know to shop around and ask lots of questions, because fees and surrender provisions vary significantly.

We need to motivate people to seek out professional investment advice regardless of their current income and how little investment income they may have accumulated. A few hours and a few hundred dollars’ worth of professional advice can make a significant difference in the long run to someone with even limited savings.

As much as anything else, we need to help people understand that retirement is a goal that you can ease into, not an event that has to take place at a specific, pre-determined age. Individuals can go on “retiring” for decades. Retirement, as we see it now, undoubtedly will look different in 10 or 20 years time.