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With the decline of private pension plans and worries about the future of social security, retirement planning is more important than ever.  Many people make a commitment to save money in order to supplement Social Security and maintain our lifestyle when the time comes to retire.   We also spend a great deal of time trying to figure out the best investment approach available.

Unfortunately, most people have no idea how much they actually need to save.  A recent study in CNN Money showed that, of those saving for retirement, only 10% had assessed the amount they need to save.  The general concensus is to put away 6% to 8% percent of earnings every year but this really does nothing to address each persons unique situation. We also tend to ignore the substantial effects inflation will have on future income.

We utilizes a software program called IMAX that provides clients with a picture of how much they need to save for a comfortable retirement.  The program takes all current variable into consideration such as inflation rate, future social security payments and COLA increases, investment return, taxes, future living expenses, ect. in order to paint a picture of your savings needs.  IMAX will provides a detailed report on your current situation and will show if adjustments are needed going forward.  Using the program you can also see the effect that changes to current strategies will have on future results. 

Please contact us if you would like to have a personal profile completed.  There is no cost for this service and it will provide real, tangible information that can be used for current and future retirement planning.

A sample profile is attached here for review

Those who have qualified retirement accounts (An IRA, 401K, or other account that has never been taxed) will need to start paying Required Minimum Distributions (RMD’s) at age 70.5.   RMD’s specify that you must take annual distributions from your qualified accounts every year.  Failure to do so will result in substantial IRS tax penalties.  

For a updated RMD calculator click here

The RMD is based on a table that determines what percentage in a given year needs to be paid.  The percentage amount increase with age.  Roughly, a person who is 70.5 will need to take about 3.7% while a person who is 80 will need to take approximately 5.6%.  

Many people are taking money out of the qualified accounts every year for income which meets the RMD requirement on an annual basis.  This does not pose a problem for them but it does for people that are trying to preserve a qualified account in order to pass it on to heirs.   For them, the annual RMD reduces the amount in the account which reduces the amount they will pass on.   If they can achieve annual account growth in the market to off set the distribution, the account will be preserved but how many investors have been earning over 4 % every year with their investments?

Two companies have products that specifically address this problem.  Annexus (Aviva) and Security Benefit have both come out with annuities with RMD friendly death benefit riders.  These products will provide a minimum guaranteed growth on the account as a death benefit regardless of actual account growth.  In other words, the actual account value may be going down every year but when the owner dies, the death benefit payout will reflect a minimum growth of 4% per year. Both companies currently offer a 4% growth minimum. 

They both also offer a feature that allows any account value gains to be stacked on top of the 4% growth.  For example, if the Annexus product earns 3% interest in a year, the 3% is added to the minimum 4% death benefit growth for a 7% interest rate that year.  The accumulation accounts can never product less than a 0% return in any given year which means the death benefit will never grown less than 4%

Both products will work well to preserve qualified assets for those looking to pass them on.  The Security Benefit Product currently has a 10% bonus which gives it a small edge however.

Click here for illustrated example of a 70 year old with $100,000

The ability to sustain a steady income during retirement years has always been a primary concern for people in the United States. Recent studies have shown that 61% of U.S residents age 44 to 75 are more afraid of running out of savings/income than they are of death. In order to avoid exhausting a savings nest egg, guidelines have been developed. The most popular is the 4% income rule.

The 4% rule was developed in the early 1990’s by a certified financial planner named William Bengen. He set 4% as the amount of money a retiree can take out of their investments every year with a high probability that it will last for at least 30years. Since that time, financial advisors have been using it as the benchmark with clients.

A recent study from The Journal of Financial Planning has suggested that 4% is no longer a safe number. The study determined that 1.8 % is more appropriate to ensure income does not run out during retirement. The revised rate was based on many market factors. One marker was the historically high price to earnings ratio in the market which may lead to low future investor returns. The risk of poor market timing was also a factor. Taking income at the start of a bear market can have a drastic negative effect on account values and the ability to take future income.

Using a 1.8% model instead of a 4% model may be safe but it has obvious drawbacks. Consider that a person with a $500,000 investment account can only safely pull $9,000 a year from it versus the 4% model which allowed them to take $20,000 a year. If the 1.8% rule is going to be followed, there is an obvious need to increase the investment nest egg prior to retirement which may not be feasible for many people.

An alternative to this approach would be to use a guaranteed insurance contract (GIC) to create the needed income. The advantage of guaranteed contract is the ability to draw a much higher percentage of income on a guaranteed basis. The most competitive GIC’s will currently pay 5.5% to 6.0% income for life on a single life and 5% on a joint life basis. Most contracts do not require forfeiture of the lump sum invested. Some GIC contracts also offer a guaranteed roll up rate during the accumulation period. It is not uncommon for companies to offer a 7% or 8% compound accrual rate for up to 30 years. The guaranteed roll up allows for more precise planning of future asset needs.

While using a GIC can offer many advantages, caution most also be taken. There are hundreds of companies currently offering various bells and whistles on GIC contracts in order to gain market share. Some offer benefits or rates that look appealing but really have little benefit to the consumer. Others will promote incredibly high roll up on accumulation but will then lower the guaranteed income payout. The most important features should be compared prior to choosing a contract in order to obtain the best guarantees available.