Category: Lifestyle

Effective Retirement Plans Do Not End at Retirement

There are those fortunate individuals who, because of wise planning, are able to retire without having to worry about how much money they can spend after their paychecks stop.  These people can afford their needs and wants from sources like pensions and social security that adjust for inflation.  They have probably been saving all of their lives and have always lived below their means.  Others are not so fortunate.

Most middle class retirees fund their retirement spending from Social Security, a pension (perhaps), and income from investments.  Because people often live several decades after retirement, it’s vitally important to make estimates and projections about the future.

Here are just a few of the things that factor into how much it will cost to live once you retire:

  • Your basic living expenses; your “needs.”
  • The cost of your “wants” and “wishes” above your basic expenses
  • The age at which you want to retire.
  • The number of years in retirement.
  • Spousal income and, in two income families, the age at which each spouse retires.
  • Your pension benefits.
  • Life, disability and long-term-care needs.
  • The age at which you apply for Social Security.
  • The value of your investment assets at retirement.
  • The estimated return on your investment assets.
  • Your risk tolerance.
  • The rate of inflation during retirement.

Putting all these factors together is a complicated process that’s beyond the capability of most individuals who don’t work in finance.  Complex planning programs have been developed that can provide answers.  These answers typically provide a probability of success or failure via a procedure called “Monte Carlo” analysis.

We have found that people who begin planning early can make appropriate mid-course corrections while they still have time.  It also provides them with the peace of mind.  Having a well-thought-out plan for the future removes a great deal of worry an uncertainly.

If you are approaching retirement without a plan, give us a call for more information.  We would be happy to meet with you to discuss your needs.

Even the “rich” can’t afford retirement.

Investment Approach

Registered Investment Advisors (RIAs) deal with people at all wealth levels but most are upper income even if they are not billionaires.  There is a retirement crisis and it’s not just hitting the working class.

The typical median wage earner making $50,000 a year and retiring at 67 can expect Social Security to pay him and his wife about $2400 per month.  To maintain their previous spending levels this leaves a gap of about $1000 a month that has to be made up from savings. But many of these middle income people have not saved for their retirement.  Which means working longer or reducing their lifestyle.

This problem is also hitting the higher income people.  How well is the person earning over $200,000 a year going to do in retirement?  The issues that even these so-called “rich” face are the same:  increased longevity, medical care, debts and an expensive lifestyle are all issues that have to be considered.

“The $200,000+ executive expects a fine house, two cars, two holidays a year, private schools, to pay for his kid’s university tuition, and so it goes on. And this is not to mention the tax bill he’s paying on his earned income. A bunch of all this was really debt-funded, so effectively the executive spent chunks of his retirement money during his working days.”

When high income people are working, they usually don’t watch their pennies or budget.  But once retired, that salary stops.  That’s when savings are required to bridge the gap between their lifestyle and income from Social Security and (if they’re lucky) pension payments.  At that point the need for advance planning becomes important.

Before the retirement date is set, the affluent need to create a retirement plan.  He or she needs to know what their basic income needs are; the cost of utilities, food, clothing, insurance, transportation and other basic needs.  Once the basics are determined, they can plan for their “wants.”  This includes things such as replacing cars, the cost of vacation travel, charitable gifts, club dues, and all the other expenses that are lifestyle issues.  Finally, there are “wishes” which may include a vacation home, a boat, a wedding, a legacy.  The list can be a long one but it should be part of a financial plan.

If the plan tells us that the chances of success are low, we can move out our retirement date, increase our savings rate or reduce our retirement spending plans.

This kind of planning will reduce the anxiety that is typically associated with the retirement decision making.

Why Your Home is a Poor Investment

Image result for homes

A couple we know moved to a new house recently.  They sold their old for a little more than twice the price they originally paid.  Doubling your money sounds like a great deal, right?

Not so fast.

To determine if the house was a good investment we need to make some calculations.  They originally bought their old home about 33 years ago.  That means that the return on their investment was just 2.4% per year.  To put it in perspective, 33 years ago CD rates were around 10%.  Viewed strictly from an investment perspective, they could have made a better return on their money if they had bought a CD.  And that’s to say nothing of maintenance and upkeep, costs not associated with CDs.

On the other hand, you can’t live in a CD.

How about investing that money in the stock market?  Over that same period the S&P 500 grew 8.5% annually.  That means that every $100 invested in the market 33 years ago would have grown to $1476!

The reason that so many people think that their home is their best investment is that they don’t sell their home very often.  As a result, they look at what they paid and what they sold it for.  If they held it for many years, it usually looks like a big number, and it is. But when viewed strictly as an investment, the annual growth rate is small compared to the alternatives.

As we alluded to earlier, home ownership also involves many other expenses.  There are property taxes and insurance.  Homeowners know that repairs and maintenance are expensive and never ending.  After all of the expenses are taken into account, the real return on home ownership may be even less that our earlier calculation.

But a home is much more than an investment.  It’s a place to live, a place to raise a family, a place to call your own.  A home is a refuge from the rest of the world.  The alternative is renting, wherein you often have more flexibility and are not on the hook for all of the repairs and maintenance.  But it also means that your monthly payment to your landlord is not going into equity that home ownership provides.

We are homeowners and advocates of home ownership.  The point of evaluating the true value of the home as an investment is to bring reality to the financial aspects of home ownership. It’s also a warning against investing too much of our resources in the family home, making many people “home poor.”

Making Smart Decisions About Social Security

Social Security CardDeciding when to start collecting your Social Security retirement benefits is an important choice that will impact the income you receive for the rest of your life.  The decision can also affect the income and lifestyle of a surviving spouse.
When it comes to Social Security, you may be wondering whether you should: 

              • Start collecting before Full Retirement Age but receive a reduced benefit?
              • Wait until Full Retirement Age to start collecting your full benefit?
              • Delay past Full Retirement Age to maximize your benefit?

To help make an informed decision, you’ll want to consider a number of key factors, including your marital status, your health, your plans for retirement and your retirement income sources, just to name few.

Your Full Retirement Age (FRA) is the age at which you qualify for 100% of your Social Security benefits (known as your Primary Insurance Amount).  Your FRA is based on your year of birth.  See this chart from the Social Security website to find yours:


When you’re ready to start collecting benefits
, you should apply for Social Security no more than four months before the date you want your benefits to start.

If you start collecting Social Security benefits and then change your mind about your choice of start date, you may be able to withdraw your claim and re-apply at a future date, provided you do so within 12 months of your original application for benefits.  All benefits (including spousal and dependent benefits) must be repaid. You may only withdraw your application for benefits once in your lifetime.

You generally have three main options when it comes to choosing when to start collecting your benefits – a process often referred to as your Social Security “filing strategy.”

  • Start collecting early (before Full Retirement Age)
  • Start collecting at Full Retirement Age
  • Start collecting after Full Retirement Age

Each filing strategy has advantages and disadvantages.

Order our white paper on Social Security claiming strategies by calling our office (757-638-5490) or emailing us at info@korvingco.com.

Will Retiring Force Cutbacks in Your Lifestyle?

For most people, retiring means the end of a paycheck.  When you retire, how will your lifestyle be affected?  If you don’t know the answer to that, don’t you want to find out before it’s too late?  There are so many things to take into consideration, including:

Retirement age – Modern retirees face lots of choices that their parents did not have.  There is no longer a mandatory retirement age, so the question of “when should I retire?” gets more complicated.

Social Security – The age at which you apply for Social Security benefits has a big effect on your retirement income.  Apply early and you reduce your monthly benefits by 25% – 30% depending on your age.  Wait until you’re 70 and you increase your monthly benefit by up to 32% (8% per year) depending on your age.  If you are married the decisions get even more complicated.

Pension – If you are entitled to a pension, the amount you receive usually depends on your length of service.  The formula used to calculate pension benefits can get quite complicated.  Those who work for employers with questionable or shaky financials may want to consider whether they will get the benefits they are promised.  If you are married, you will need to decide how much of your pension will go to your spouse if you die first.

Second career – An increasing number of people are going back to work after initially retiring.  Quite a few people don’t really want to stop working, but instead want to do something different or less stressful in their retirement.  Others use their skills to become consultants, or turn a hobby into a business.  A “second career” makes a big difference in your retirement lifestyle and how much income you will have in retirement.

Investment accounts – These are the funds you have saved for retirement in: IRAs, 401(k)s, 403(b)s, 457s, and individual accounts.  These funds are under your control.  Most retirees use them to supplement their Social Security and pension income.  They play a very large role in determining how well people live in retirement.

To find out whether you will be forced to cut back after you retire, you need a plan that allows you to take all these factors into consideration.  A plan allows you to gauge your progress and make corrections before it’s too late.

If you have questions, or if you would like to create a retirement plan, contact us.

What are your retirement goals?

A recent issue of Financial Advisor magazine reports that “millennials” (people between age 18 and 34) view retirement goals differently from their parents.

Instead of viewing retirement starting at a certain age, like 65, millennials expect to retire when they reach a certain financial goal.

Fifty-three percent of millennials view retirement as the start of something exciting. In comparison to their elders, 21 percent of millennials are more likely to make pursuing a passion, furthering their education or starting or growing their own business their priorities in retirement.

We at Korving & Company are in the business of helping people achieve their financial goals. How do you view your financial goal? Please use the response button below to let us know.

The Ten Best States for Retirement

From Wealth Management:

  1. Wyoming – It has among the lowest tax burdens in the country; well below the national average for crime rates.  Good weather; cool climate, summer nights are mild, few cold waves during the winter, humidity is also super low, making it the perfect place for retirees who don’t like stuffy summers.
  2. South Dakota – It has one of the lowest tax burdens in the country tying with Wyoming.  It also scored well for overall happiness, particularly when it comes to social well-being.
  3. Colorado – It has great weather, ample sunshine and little humidity.  It scores high for well-being in the Gallup-Healthways index and has a relatively low tax burden.
  4. Utah – It ranks sixth best in the nation for weather, lots of sunshine and low humidity.  The cost of living is below the national average.
  5. Virginia – It has a low cost of living, and a low crime rate. The state also received above-average marks for health care quality and weather.
  6. Montana – The weather ranks above the national average.  Montana ranks high for well-being; residents fell good about their community.  Cost of living and taxes are below the national average.
  7. Idaho – It’s a safe place for retirees to settle down; cost of living and crime rate both ranked among the lowest on the list.  Housing in Idaho is extremely affordable.  Weather and recreational resources add to its appeal.
  8. Iowa – Quality health care is a big feature here along with a low crime rate and an affordable cost of living.
  9. Arizona – It’s warm with great weather; rarely a a cloud in the sky.  It ranked in the top 10 in the Gallup-Healthways Index for overall wellness combined with a fairly low tax burden on its residents.
  10. Nebraska – It has a relatively low cost of living and a low crime rates. Residents here report being slightly happier than people in other states, based on the Gallup-Healthways Well-Being Index.

We’re fans of Virginia, our home state, but the others also sound interesting.

The Advantages of Waiting to Retire at 70

There are a number of reasons why people should think about delaying retirement past the traditional age of 65. The retirement age of 65 was set in 1935 when Congress enacted Social Security and lifespans were much shorter.

Several things have happened in the decades following 1935 that now makes it reasonable for people to delay retiring until age 70. First, the structure of work has changed. Instead of working on a farm or doing heavy lifting in factories, the typical American worker is physically capable of working longer than 65. For the vast majority of workers, there’s more sitting or standing than manual labor. The second factor is the longer lives that U.S. citizens now enjoy. While not universally true, many people do enjoy their jobs do and prefer to go to work instead of sitting around the house or playing endless rounds of golf.

From the financial perspective, it makes even more sense to work past age 65. Monthly Social Security checks increase by 76% just by waiting until age 70 to retire instead of collecting at age 62 (the first year of eligibility) –76%!

As people get older and advance in their careers, their salary often increases with their tenure, meaning that if they leave at age 65, they could be leaving during their peak earning years. By continuing to work they can continue to add to their retirement savings. This is important for people with pensions whose retirement benefits continue to grow the longer they work. And it becomes even more important for people whose retirement is self-funded by their 401(k) plan, IRA or other investment portfolios.

Finally, from a purely actuarial perspective, the longer we work and bring in income, the less time we will spend fully retired and withdrawing from our retirement savings. The greatest fear that people have is running out of money during retirement. Delaying retirement until age 70 or beyond reduces that possibility.

Rent or Buy?

Should you rent or buy a house?  That’s a question often asked by young couples, those in the military, and people who are undergoing life changes.  The main reason that people want to buy rather than rent is because they view renting as throwing money away and not building equity.  Additionally, buying a home provides a feeling of stability.

However, there are downsides to buying.  Buying a house locks you into a situation.  If your life changes, you lose your job, or wish to move, selling a home can be difficult and expensive.  Owning a home means that you have upkeep and maintenance costs.  If you rent those costs are borne by the landlord.  The cost of rent is often less than the costs associated with home ownership; mortgage payments, real estate taxes, insurance, maintenance and all the other costs that a home owner faces.

Over the long term, owning a home has been a good investment for many families.  But more recent history has clearly shown that the assumption that a home will always go up in value is not true.  Just ask the people whose homes went on the market as “short sales.”

If you are an individual who is contemplating whether to rent or buy, keep these issues in mind.  If you’re not sure, get the advice of a financial planner who can run the numbers for you and help you make the right decision.

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Korving & Company, Investment Management, Suffolk, VA

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