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Americans Rip Up Retirement Plans

New news from Conference board reported in the Wall Street Journal shows that nearly 2/3’rds of Americans are now planning to delay retirement.

Financial losses, a sluggish economy, and stubborn unemployment contribute to the delay in plans and decrease in expectations.  And meanwhile, the percentage of workers over 60 in the workforce is growing.

The article appears Here:

Many middle-aged Americans, though, drew down their savings during those lean years and now find that leaving the work force on their original timeline is no longer viable, he said.

They are also facing low interest rates, an uncertain future for Social Security, and a lower likelihood of receiving employer health insurance after retirement.

If your retirement plans are in a shambles, it might be time to consider how a guaranteed income annuity can create the solid foundation you need for a happy retirement.

It’s not about how much money you have- it’s all about how much income you can depend on.  It’s income that fuels a happy retirement, and there’s nothing better than a GUARANTEED income.

Give us a call, we can help.

4% Rule Under Fire- Again

4pctThe often-quoted ‘4% withdrawal rule’ that mainstream investment managers use as a guideline ‘safe’ withdrawal rate for a portfolio has come under fresh fire.

The volatility of the last few years should have already given most conservative investors enough heartburn to not stake their life savings on this faulty rule of thumb.  But new research is showing just how disastrous bad advice can be.  We’ve written about this flawed approach before as well.

The 4% Rule Background

The ‘4% Rule’ isn’t really a rule.  Rather, it’s an asset withdrawal rate promoted initially by a retirement planner named William Bengen.  The theory states that a safe retirement withdrawal rate starts out by drawing down just 4% of your portfolio and adjusting up only for inflation.  Testing against 75 years of historical stock and bond prices shows the probability of failure – meaning, the chance of running out of money in a 30 year retirement, at an acceptably low probability of about 6%.

Where It Falls Apart:

In its day, the “Rule” made sense, but that day was 1994.  The US had strong market performance year over year in the preceding decade, and portfolios grew at a solid rate even with withdrawals.

Well along comes the Tech Bubble, a Black Swan event, and then a Flash Crash, computerized trading, the lost decade of the 2000’s, the banking crisis, international currency crisis, and the real estate crash.  Oh yeah, THAT awful decade….

Retirees looking to their assets for income, and carrying their own longevity risk, saw portfolio values decimated, and at the same time were forced to sell securities while they were down for income.

Welcome to Reverse Dollar Cost Averaging- Getting kicked while you are down.

Well in case you didn’t already know from common sense, you can’t pull money out of a depreciated portfolio and expect it to bounce back and stay on track indefinitely.

The Case for Annuities:

I probably don’t need to belabor the point that annuities are MADE for times like this- quite simply, you buy security and safety of income, and offload major risks like longevity and loss of principal on a strong insurance institution. That’s all there is to it.  How we put together a plan for you depends on your needs and assets, so get started by giving us a call today.

 4% Rule- New Research

New research from a distinguished trio of academic and research economists has driven a new nail in this coffin.  Michael Finke, Wade Phau and David Blanchett have re-run the economic simulations that Bengen initially based his finding on with TODAY’s actual reality of low to negative real (after inflation) bond yields.

Instead of a 6% probability of failure, today’s rate environment produces an astounding 57% probability of portfolio ruin.  Remember, ruin means running out of money- kaput, no groceries, no roof over your head.  Does that sound a like a good way to spend your final years?  At 57%, this is almost a certainty of failure!

Here are several quotes from the Author’s excellent new study (Available Here):

The safety of a 4% initial withdrawal strategy depends on asset return assumptions.  Using historical averages to guide simulations for failure rates for retirees spending an inflation-adjusted 4% of retirement date assets over 30 years results in an estimated failure rate of about 6%. This modest projected failure rate rises sharply if real returns decline.

As of January 2013, intermediate-term real interest rates are about 4% less than their historical average. Calibrating bond returns to the January 2013 real yields offered on 5-year TIPS, while maintaining the historical equity premium, causes the projected failure rate for retirement account withdrawals to jump to 57%. The 4% rule cannot be treated as a safe initial withdrawal rate in today’s low interest rate environment.

Some planners may wish to assume that today’s low interest rates are an aberration and that higher real interest rates will return in the medium-term horizon. Although there is little evidence to support this assumption, we estimate how a reversion to historical real yields will impact failure rates.

Because of sequence of returns risk, portfolio withdrawals can cause the events in early retirement to have a disproportionate effect on the sustainability of an income strategy. We simulate failure rates if today’s bond rates return to their historical average after either 5 or 10 years and find that failure rates are much higher (18% and 32%, respectively for a 50% stock allocation) than many retirees may be willing to accept.

The success of the 4% rule in the U.S. may be an historical anomaly, and clients may wish to consider their retirement income strategies more broadly than relying solely on systematic withdrawals from a volatile portfolio.

As Pfau (2010) showed, the success of the 4% rule is partly an anomaly of the US historical data. In most other countries sustainable initial withdrawal rates fell below 4%. We find there is nothing inherently safe about the 4% rule. When withdrawing from a portfolio of volatile assets, surprises may happen. This study demonstrates that when we recalibrate our assumptions for Monte Carlo simulations to the current market conditions facing retirees, the 4% rule is anything but safe.

We also show that a 2.5% real withdrawal rate will result in an estimated 30 year failure rate of 10 percent.  Few clients will be satisfied spending such a small amount in retirement.  It is possible to boost optimal withdrawal rates by incorporating assets that provide a mortality credit and longevity protection.  Pfau (2013), for example, estimates that combining stocks with single premium immediate annuities, rather than bonds, provides an opportunity for clients to jointly achieve goals related both to meeting desired lifestyle spending, and to preserving a larger reserve of financial assets. In the absence of some added income protection, there is a high likelihood that low yields will require planners to rethink the safety of a traditional investment-based retirement income plan.

Can You Sell The House And Travel The World In Retirement?

World Retirement Map

In today’s Wall Street Journal we have a fantastic article on a totally unorthodox retirement plan.  Instead of worrying about your dream home, or cashing out of your suburban home for a rural property in retirement, Lynn and Tim Martin cash out of California, put their precious possessions in storage, and hit the road.

Years later, their retirement is less expensive, more enjoyable, and more exciting than anything they imagined.

The Martins spent several years traveling the world, renting homes or apartments in Mexico, Paris, London, or wherever their heart desired.  They are not extravagantly wealthy or foolhardy.  Rather, they enjoy getting to know a new place, and taking the time to explore the back roads.  Sounds like a wonderful retirement plan, and they’re doing it on far less money than it would take to live a lifestyle similar to that which they left behind in California.

The Wall Street Journal article is well worth your time, if only to expand your mind.

The Let’s-Sell-Our-House- And-See-the-World Retirement: 

How one couple walked away from all they owned and are putting down new roots— one country at a time.

You can Read It Here:

Boost Your Social Security Check

Maximizing Social Security can  have a dramatic effect on your lifetime guaranteed income. Social Security is a source of  guaranteed income that is indexed to inflation, so it makes sense to get that benefit as high as you can.

This Wall Street Journal article discusses some of the various  strategies, which include  ‘File and Suspend’ and ‘Restricted Applications.’

If you’re considering an annuity and know that Social Security is a part of your retirement plan, give us a call.  We have tools that assist you in making an informed decision about getting the most out of the System.

The File and Suspend approach is described this way:

A claiming strategy called “file and suspend” can help get the most money. Say a husband plans to delay his benefit until age 70. He is allowed to claim his benefit at his normal retirement age—say it’s 66—and then immediately suspend it.

That way, his benefit amount keeps growing—thanks to those delayed retirement credits—but since he did make that initial claim, his wife, at her full retirement age, can file a “restricted” application to claim spousal benefits based on her husband’s record, but not her earned benefit.

Generally, spousal benefits are up to 50% of the other spouse’s monthly benefit at full retirement age (some age restrictions apply). In this scenario, her own benefit now can grow until she hits 70, too.

In one hypothetical “file and suspend” scenario, a couple, both 66, could collect an additional $60,000 by delaying their benefits and the wife taking spousal payouts while they wait, says Lisa Colletti, New York-based director of wealth management at Aspiriant.

Outsourcing Retirement To India

On a lighter note, my retired in-laws can’t wait to go see “The Best Exotic Marigold Hotel” for a second time.  The trailer for the movie made me want to see it too.  For any of our readers considering retiring abroad, this movie might be well worth seeing before you book your one way ticket. Let me know what you think of it- it’ll be a week before I get a chance to see it.

A group of British retirees decide to “outsource” their retirement to less expensive and seemingly exotic India. Enticed by advertisements for the newly restored Marigold Hotel and bolstered with visions of a life of leisure, they arrive to find the palace a shell of its former self. Though the new environment is less luxurious than imagined, they are forever transformed by their shared experiences, discovering that life and love can begin again when you let go of the past.

http://www.imdb.com/title/tt1412386/

Funding The Post Pension Retirement- Wall Street Journal

The weekend Wall Street Journal brought us another piece that underscores the need for stable lifetime income in retirement.   Fewer and fewer people retire with employer pensions, yet we all must plan for retirement that may stretch into our 90's or longer.  The article says:

Far more people will retire without pensions and will need to rely on their accumulated savings to pay for everything that Social Security doesn’t cover.

So how will you turn those funds into the monthly income you will need to pay your bills? The answer is murky at best.

Previous generations built "ladders" of bonds with staggered maturities and invested in dividend-paying stocks, expecting to live solely on the returns. But low interest rates and a volatile market have made those strategies difficult

The article continues with good pointers and explores the pitfalls inherent in relying on any one strategy alone.  It should sound familiar to regular readers of Annuity Straight Talk.  Our pages on building your own Private Pension explore the  topic thoroughly.

The Lifetime Income Answer:

It doesn’t take extensive analysis by The Wall Street Journal to get to a Main Street common sense conclusion: In retirement, individuals need to convert their assets into income, and need it to last a lifetime.  And in to be in harmony with their risk tolerance, they should find as strong a guarantee as possible to absolutely, positively ensure that they can never run out of income.  That is a secure retirement. 

Turn that statement around for a second- if you are comfortable facing the chance of losing a significant portion of your assets in a stock market downturn, and possibly being forced to radically alter your standard of living to suit your diminished means, then by all means, stay invested in the markets. 

Hopefully, this illustrates that a more prudent strategy is to lock in enough income to guarantee your base standard of living.  Take care of housing, food, and cost of living with Social Security, annuities, and/or pensions- and then leave your remainder assets invested in the markets, real estate, or other endeavors.  That way, when the next market crash comes, you will have insulated yourself from the most dire consequences.

The Journal closes with this advice as well:

Ultimately, we may have to become as alert to retirement asset-allocation and withdrawal strategies as we have become at investing and accumulating. Depending on how much you save and how much you want to spend, you may find you want a mix of products and services.

A mix of products and services is definitely appropriate, and will vary for everyone.  No one size fits all.   Annuity Straight Talk stands ready to assist you in devising a lifetime income strategy suitable for your needs.  Give us a call at 800-438-5121.

 

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Reverse Dollar Cost Averaging

I dug this paper out of the archives because it presents an extremely valuable lesson for anyone thinking about withdrawing investment assets for retirement income. And that means everyone. Most people understand the benefit of dollar cost averaging during the saving years. Few people realize, however, that those principles work against you when taking income from your nest egg. The result is a phenomenon called reverse dollar cost averaging. Let’s take a look at the problems this could potentially cause and some possible solutions.

This study was completed by Henry K. Hebeler in January of 2001 and can be found here. It is a quick read with a very important thesis…

In the author’s words:

The message is loud and clear. The returns for retirement planning are far too high for a retiree who wants a fair chance of financial survival.

Why is this? Please allow me to paraphrase some of the information. The principle of dollar cost averaging shows that buying a large number of shares at low prices when the market is down more than offsets the cost of buying fewer shares at higher prices when the market is up. This leads to greater than average returns over the long run and offers a major advantage to systematic savers. All major financial institutions have marketed this to the maximum extent to teach consumers the value of regular investment contributions and long-term strategies.

But there is another side to this story. For every buyer of securities there must be a seller or as Hebeler puts it, “for every winner there is a loser.” The loser in this case is the person selling stocks for income purposes. Selling stocks systematically presents the exact opposite effect on long-term returns, also known as reverse dollar cost averaging.

Over time, returns for buyers and sellers will average out. There’s no win/win. Historical data proves that regular withdrawals produce less than average returns just as regular deposits produce higher than average returns. This presents a major challenge for advisors and consumers who are looking to manage assets for the traditional 4% annual retirement income withdrawal.

So, is it possible to combat the negative effects of reverse dollar cost averaging? Yes it is, and the basic approach is simple. All you have to do is separate income assets from growth assets in order to optimize your portfolio throughout retirement. It is an actuarial fact that a portfolio cannot be optimized without a source of guaranteed lifetime income.

When your retirement income source is insured and stable, you can more easily afford to ride out low points in the market. If you know that no matter what happens your paycheck is guaranteed, you can wait to sell shares when the market returns to normal levels. This is an important lesson because you need to be prepared for every opportunity to do better than average.

Guaranteed income does in fact offer far more benefits than just guaranteed income. As crazy as that sounds it’s an actuarial, mathematical and economic fact, as illustrated in Hebeler’s study. I’ll do more in the future to drive this point home.

Are you interested in protecting yourself from the phenomenon of reverse dollar cost averaging? That should be an easy question to answer. Call, email or make an appointment now to give yourself every possible advantage for a solid retirement income plan.

Bryan J. Anderson
800.438.5121 [email protected]

Retirement Assets That Last a Lifetime

It’s no secret many pre-retirees are woefully unprepared for retirement.  And now that retirements, along with life expectancies, are lasting longer than ever, the challenge of stretching retirement assets to the max is becoming more and more difficult.

I’d like to refer all members this week to a report from The Weiss Center For International Financial Research at Wharton.

This is a good write-up that talks about things people need to hear instead of what they want to hear.  Wharton has always been a credible source of information since it is an educational institution dedicated to factual research.

The report mentions that  more than half of people approaching retirement have not saved enough and it also suggests that individuals who spend time planning are much more likely to be financially stable throughout their retirement years.

The keys to hitting your retirement target date are protecting what you have now and saving as much as possible until then.  Have you considered annuities as a way of decreasing the burden?

Understanding annuities is why this site was created but placing them inside a well-designed retirement plan takes expert guidance.

Use this site as an informational resource and be sure to call or email me when you are ready to stop taking chances with your financial longevity.

Bryan J. Anderson

800.438.5121 [email protected]

Find More Retirement Income strategy here

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How To Buy An Annuity

When you are on the verge of making a major financial decision, you must walk through the proper steps to make sure you are aware of all risks.  This comprehensive list will help show you how to buy an annuity.

At Annuity Straight Talk, we use these basic strategies to determine the best annuity for long-term financial stability and profitability.

Suitability

Is an annuity right for you? The suitability quiz on this site will help align your goals with the benefits of an annuity.

Financial Review

Review your financial assets and goals and determine your allocation to this investment. Things to consider:

  1. Your Time Horizon
  2. Your Current Asset Allocation
  3. Your Goals
  4. Your ‘Rainy Day’ Plans and Funds

Strategic Positioning

Is an annuity flexible enough for your financial future?

Good annuities provide great flexibility and keep options open in retirement planning. Avoid tunnel vision by remembering these important facts.

  1. Length of retirement… life expectancy
  2. Number of working years remaining
  3. Future cost of health/long term care
  4. Maintain growth throughout retirement
  5. Navigate the maze of mandatory retirement plan distributions

Product Selection

Which product offers you the best terms, flexibility and profitability?

The Retirement Income The Right Way Report will give you the tools to analyze all viable products. This is an essential step to empower yourself and verify that the insurance company and advisor are offering the right products.  This is a free download from this site, use the form to the right.

Review and Implementation

Make a list and check it twice. Leave no question unanswered. Then, buy the annuity and relax knowing you have made a solid choice.

This approach will allow you to make an informed decision based on all factors unique to your personal financial situation. You will also set yourself up for a lifetime of good choices. Take the first step and get our Retirement Income The Right Way Report.

How To Buy An Annuity

We believe the best person to trust in financial decisions is yourself. Tackle that responsibility with the tools and information from Annuity Straight Talk.

Step #1 is to sign up for our free Retirement Income The Right Way Report. This free report is available to help you understand these popular products, and you may be surprised to learn some of their pitfalls. Simply fill in your name and email and we’ll send it to you right away.

Step #2 is to visit the Members Area of Annuity Straight Talk- this free membership and The Retirement Income The Right Way Report is available to our members. This report outlines in detail the decision process and critical factors necessary in buying an annuity.  Furthermore, in the Members Area are a host of other downloads and Product Detail Reports that outline specific details about each of the kinds of annuities you might consider

Step #3 is a strategy session, available to our members. These simple questions help us see if an Annuity is right for you, and help us to design an Annuity solution for your needs.

When you have the tools to make an informed decision, allow us to recommend annuities that meet your specific needs. You will find our recommended products and companies come with the best combination of Safety, Flexibility, and Profitability for your situation.