Category: Pension

Retirement: The Good News and the Bad News

First, the good news. According to a leading investment firm, current retirees are doing just fine. They studied a large group of retirees. They’re doing very well.  The group that retired about 20 years ago have about 80% of their retirement savings intact. In fact, one-third of these retirees have more money than when they retired.

But here’s the bad news. These retirees are different from those retiring today or those just beginning their careers. Their experiences are different and so are their resources.

If you have been retired for 20 years that makes you about 85 years old. These older retirees grew up during the “Great Depression” and that had a lifelong impact on them. Their experience made them lifelong savers. Many also worked for companies that provided their employees defined benefit pension plans.

This means is that many of these pensioners have two sources of income: a company pension and social security. Living within their means, they were able to leave their personal retirement assets untouched.

Some of the more affluent may have bought vacation homes which have appreciated in value. Others have begun gifting to their children and grandchildren.

We can’t infer from their success that newer retirees will do nearly as well. There are several reasons why. Except for government employees, few private sector employees have defined benefit pension plans. Social Security is under pressure and will simply not have enough in the Trust Fund to continue to pay retirees at the same rate as current retirees. Medicare is also running large deficits which will result in higher medical expenses for the elderly.

New and future retirees will not have private pensions, face lower social security income and higher medical expenses. Only saving and investing wisely will save them.

For more information contact us.

The Importance of 401(k)s.

Pensions are fading fast.  If you work for a private company the chances are good that your retirement plan is a 401(k), not a pension plan.   Even if you work for the government, the chances are that the entity you work for will resemble Illinois eventually.

That leaves you with the responsibility for your retirement.  There are two problems with the 401(k).

The first is that too many people do not participate.  Even when employers match their employee’s contribution, not everyone takes advantage of this “free money.”

The second problem is that most people don’t have enough information on the investment choices they are given in their 401(k).    Investing is complicated.  Most plans offer dozens of choices and few people know enough about investing to use them to create an appropriate portfolio.

Employers are not equipped to provide the information.  Most do not want to assume the liability that giving investment advice exposes them to.  An RIA (Registered Investment Advisor) who is also a CFP™ can provide the guidance people need to make sense of the investment option in a 401(k).   Find a CFP™ in your area.

What is the difference between a 401(k) and a pension plan?

Both plans are designed to provide income for retirement.  There are some very important differences.

A 401(k) is a type of retirement plan known as a “defined contribution plans.”  That means that you know how much you are saving but not how much it is worth when you are ready to retire.  That depends on your ability to invest your savings wisely.  The benefit is that your savings grow tax deferred.  Many employers match your contribution with a contribution of their own, encouraging you to participate.

A pension plan is known as a “defined benefit plan.”  That means that you are guaranteed a certain amount of income by the plan when you retire.  The responsibility of funding the plan and investing the plan assets are your employer’s.

Because your employer is liable for anything that goes wrong with the pension they have promised their employees, many employers have discontinued pension plans and replace them with 401(k) type plans.  This shift the responsibility for your retirement income from the company to you.

If you have a 401(k) for your retirement and are unsure about the best investment options available to you, get the advice of a financial planner who is experienced in this field.

For more information, contact us.

Is your retirement plan a ticking time bomb?

In your mind’s eye, how do you see yourself living retirement?  Does it include the activities that you enjoy now … without the time you spend at work?  When you have the time, do you see yourself seeing the world?  Retirement presents an opportunity for some life-changing experiences.

But there are a few things that can cause those retirement dreams to become nightmares.

If your retirement plan includes a pension, you may want to consider the risk.  It is a fact that many private and public pension plans are sadly underfunded.  Some public pension plans are the worst offenders.  As an extreme example, the Illinois General Assembly Retirement System is only 13.5% funded.

A long period of very low interest rates means that pension plans with large bond investments have generated low returns.  It has caused others to take greater risk.  At some point that can affect the pensions of those who believed their Golden Years were paid for.

Living longer than you expected is another risk.  In 1950 the average life expectancy was 68.  That meant that the average worker retired at age 65 and died three years later.

Sixty years later, in 2010, the average life expectancy was 79 and many people are living longer.  In 2010 there were 1.9 million people over age 90 and three quarters of those were women.  One of the biggest concerns that retired people have is running out of money as savings are eroded by inflation.    How would living past age 90 affect your retirement plans?

The third thing that is causing the average worker concern about retiring is insufficient savings.  Fewer people are covered by pension plans.  Many employers have replaced guaranteed pensions called “Define Benefit Plans” with 401(k)s and 403(b)s known as “Defined Contribution Plans.”  This transfers the responsibility for retirement from the employer to the employee.  Too few people are taking advantage of these programs, not saving enough, and making unwise investment choices.  This can result in insufficient savings when the time comes to actually retire.  One result is that more and more people continue to work well past the traditional retirement age of 65.

What is to be done?

We have to accept a greater responsibility for our own retirement.  We have to be honest about how safe those pension promises are, whether we work of a large corporation or for a government entity.  We have to start saving early and make wise investment choices.  One of the wisest things people do as they prepare for retirement is get the services of a competent retirement professional who will guide them to a safe haven at the end of the road.

 

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.

How much annual retirement income will you have?

Most people believe that their home is their most expensive thing they’ll ever pay for.  They’re wrong.  The most expensive thing people ever pay for is retirement. And they’ll pay for it after they quit working.

That’s why it’s important to have a clear idea of what you’re getting into before you decide to tell your employer that you’re leaving.

The typical retiree’s sources of income include Social Security.  They may have a pension, although fewer companies are offering them.  If there is a gap between those sources of income and their spending plans, the difference is made up by using their retirement savings.

Running out of money is the single biggest concern of retirees.  The big question is how long we will live and the amount we can draw from our savings before they are depleted.

For simplicity, let’s assume: You’re ready to retire today and plan to have your retirement savings last 25 years. You’ve moved your savings into investments that you believe are appropriate for your retirement portfolio. The investments will provide a constant 6% annual return. You’ll withdraw the same amount at the end of each year.

If you saved this amount Here’s how much you could withdraw annually for 25 years
$100,000  $7,823
$200,000 $14,645
$300,000 $23,468
$400,000 $31,291
$500,000 $39,113
$600,000 $46,936
$700,000 $54,759
$800,000 $62,581
$900,000 $70,404
$1,000,000 $78,227

Keep in mind that these examples don’t include factors such as inflation and volatility that can have a big impact on your purchasing power and account value.

For example, if inflation were 4% a year, a withdrawal of $31,291 25 years from now would only be worth $11,738 in today’s dollars.

Investment losses would decrease your account’s growth potential in subsequent years. To account for these factors, you might need to save even more.

Many experts estimate that you’ll need 80% or more of your final annual salary each year in retirement. Social Security may only provide around 40% of what you need. And don’t forget that retirees typically have different types of expenses compared to people still in the workforce, such as increased health care and travel costs.

This is why planning is so important.  A financial plan will provide you with answers to many of these questions.  Retirees also need to reduce the chances that their portfolio will experience major losses due to market volatility or taking too much risk.  This is where a Registered Investment Advisor who is also a Certified Financial Planner (CFP®) can help.  At Korving & Company we prepare retirement plans and, once you approve of your plan, we will manage your retirement assets to give you peace of mind.

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Korving & Company, Investment Management, Suffolk, VA

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