Category: Running out of money

Do I Need a Financial Advisor?

Investment Approach

Not everyone needs a financial advisor. But if you are not sure about how your financial assets should be invested, or if you have made major errors when you invest, you are a candidate for getting professional financial advice.

Fees are the main barrier that keeps people from getting the kind of advice that would improve their financial lives.

But just as doctors get paid for keeping us healthy and lawyers for protecting our interests, getting good financial guidance is worth every penny. Solving our financial problems has a huge impact on our lives. Making sure we don’t run out of money during a retirement that can last decades is often people’s biggest fear in life.

People who are in good shape financially may not need assistance. However, too many times people need guidance but are reluctant to pay for what they need. Instead, they search the internet, or ask friends or family who are often not knowledgeable. And even if they get good advice, friends and family are not going to create a plan and make sure that the plan is followed. That’s not their job.

That’s were a professional investment advisor comes in. They’re paid to help you create a plan, to design a portfolio that aligns with your plan, to manage that portfolio and to alert you in case the plan needs adjusting. Like a physician conducting a periodic physical, a financial professional keeps track of your progress and fixes it when things go wrong.

If you think you may need help, find an advisor in whom you have confidence, pay them a fair fee for their services and you’ll be rewarded with peace of mind knowing that your financial future is in good hands.

Protecting and Growing Wealth when Nearing Retirement

This was a question asked by a visitor to Investopedia.
Several other advisors responded.  Here’s my contribution to the discussion.
 

You have gotten some good advice from the others who have responded.  The only advice I would add to theirs is that the years just prior to retirement and the first few years of retirement are the most critical years for you.  These are the years when significant investment losses have the biggest impact on your retirement assets.

That’s because of something referred to as “sequence of returns.”  “Sequence of returns” refers to the fact that market returns are never the same from year to year.  For example, here are the returns for the S&P 500 from 2000 to 2010.  That was a dangerous decade for retirees.

2000 -9.1%
2001 -11.9%
2002 -22.1%
2003 28.7%
2004 10.9%
2005 4.9%
2006 15.8%
2007 5.5%
2008 -37.0%
2009 26.5%
2010 15.1%

When you are accumulating assets, the sequence of returns has no impact on the amount of money you end up with.  But when you are taking money out, the sequence becomes very important.  That’s because taking money out of an account exaggerates the effect of a market decline.

If you retired in the year 2000 with $100,000 and took out 4% ($4000) to live on each year, by 2010 your account would have shrunk to about $66,200 and, if you continued to withdraw the same amount each year you would now be taking out 6%.  If you have another 30 years in retirement, that rate of withdrawal may not be sustainable.

For that reason, most financial advisors recommend creating a portfolio that can cushion the effect of poor market performance near your retirement date.

How to Avoid Fumbling Your Retirement Money

NFL football player Marion Henry retired from football at age 28.  Professional athletes usually begin a second career after they give up the game, most because they have to.  Here’s his admission:

Eighty percent of retired NFL players go broke in their first three years out of the league, according to Sports Illustrated.
I was one of them.
Out of football and money at age 28, I saw the financial woes of big-money ballplayers as symptomatic of a larger problem plaguing average Americans – a retirement problem. Experts say many people are inadequately prepared or poorly advised when it comes to retirement planning. As a result, they outlive their funds.

 

He goes on to make the point that:

When I played football, we practiced against the worst-case scenario that we could face on game day. Many Americans are not planning for those worst-case scenarios in the fourth quarter of their lives, and some who believe they are prepared may have a false sense of security.

 

People often have a false sense of security because they have not really priced out all the expenses that they will incur during retirement, nor have they considered the effects of inflation on the cost of living as they get older.  They also assume that their investments will continue to grow at the same rate as they have in the past.  And few retirees really plan for how they will pay for long-term care if they should develop serious long-term illnesses not covered by Medicare.

A good retirement planning program will take these issues into consideration.   Visit an independent RIA who will prepare a retirement plan for you and take the guesswork out of retirement.

Answering the important retirement questions.

With over 100 million people in America closing in on retirement, big questions arise.  Most investment advisors are oriented toward providing advice on how to build assets, but lack the tools and experience to advise their clients about how to live well during decades of retirement.

The most common advice that retirees get involves invoking the “4% Rule.”  That number is based on a 60-year-old-study that may well be out of date.  Individuals and families should be getting better guidance because now retirement often spans decades.  Many people are retiring earlier and living longer.

There are many critical decisions that must be made before people leave their jobs and live on their savings and a fixed income.

  • When should I claim Social Security benefits?
  • What happens if I live too long? Will I run out of money?
  • What would happen to my income if my spouse died early?
  • Will I need life insurance once I retire? If so, how much?
  • What are the effects of Long-Term-Care on my retirement plans?
  • Can I afford the items on my “wish list?”
  • Will I leave some money to my heirs?

Some Registered Investment Firms (RIAs) have the sophisticated financial planning tools to answer these questions.  They are often CFPs® and focus on retirement planning.  Once a plan is prepared, these same RIAs, acting as fiduciaries, are often asked to help their clients manage their assets to meet their retirement income goals.

If you are approaching retirement and have questions or concerns, contact us.  We’ll be glad to provide you with the answers.

Three Ways to Stay Financially Healthy Well into Your 90s

According to government statistics, the average 65-year-old American is reasonably expected to live another 19 years.  However, that’s just an average.  The Social Security administration estimates that about 25% of those 65-year-olds will live past their 90th birthday.  We were reminded of these statistics when we recently received the unfortunate notice that a long-time client had passed away.  He and his wife were both in their 90s and living independently.

People often guesstimate their own life expectancy based on the age that their parents passed.  Genetics obviously has a bearing on longevity.  Modern medicine has also become a big factor in how long we can expect to live.  Diseases that were considered fatal 50 years ago are treatable or curable today.  For many people facing retirement and the end of a paycheck, the thought of someday running out of money is their biggest fear.  And there is no question that living longer increases the risk to your financial well-being.

The elderly typically incur costs that the young do not.  As we get older, visits to the doctor and the hospital become more frequent.  There’s also the onset of dementia or Alzheimer’s that so many suffer from.  As our bodies and minds age, we may not be able to continue living independently and may have to move to a long-term care facility.

We should face these issues squarely, especially as we approach retirement.  Too many people refuse to face these possibilities and instead hope that things will work out.  As the saying goes, “hope is not a plan.”

Here is a three step plan to help you remain financially healthy even if you live to be 100:

  1. Create a formal retirement plan. Most Financial Planners will prepare a comprehensive retirement plan for you for a modest fee.  We recommend that you choose to work with an independent Registered Investment Advisor who is also a Certified Financial Planner™ (CFP®).  Registered Investment Advisors are fiduciaries who are legally bound to put your interests ahead of their own and work solely for their clients, not a large Wall Street firm. CFP® practitioners have had to pass a strenuous series of examinations to obtain their credentials and must complete continuing education courses in order to maintain them.
  2. Save. Save as much of your income as possible, creating a retirement nest egg.  Some accounts may be tax-exempt (Roth IRA) or tax-deferred (regular IRA, 401k, etc.), but you should also try to save and invest in taxable accounts once you have reached the annual savings limit in your tax-advantaged accounts.
  3. Invest wisely. This means diversifying your investments to take advantage of the superior long term returns of stocks as well as the lower risk provided by bonds.  While it’s possible to do this on your own, most people don’t have the education, training or discipline to create, monitor and periodically adjust an investment strategy that has the appropriate risk profile to last a lifetime.  We suggest finding a fee-only independent Registered Investment Advisor to manage your investments.  They will, for a modest fee, create and manage a diversified portfolio of stocks, bonds, mutual funds and/or exchange traded funds designed to meet your objectives.

The idea of saving for a long retirement should not be avoided or feared.  With the proper planning and preparation, retirement gives us the opportunity to enjoy the things that we never had time for while we were working, and can indeed be your Golden Years.

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.

The financial risks of dementia

Dementia covers a broad range of mental diseases that cause a gradual decrease in the ability to think and remember.  It often affects a person’s daily functioning and is different from the decline in cognitive abilities that are the usual effects of aging.  The most common type of dementia is Alzheimer’s disease.

About one in ten people get dementia.  It becomes more common with age and it’s estimated that about half of those over age 85 suffer from it in some degree.

As the disease progresses, most people with dementia require a certain amount of skilled care.  Eventually the family will not be able to provide the 24 hour services that the patient requires and they will be placed in a facility designed to provide that care.

According to the NY Times:

On average, the out-of-pocket cost for a patient with dementia was $61,522 — more than 80 percent higher than the cost for someone with heart disease or cancer. The reason is that dementia patients need caregivers to watch them, help with basic activities like eating, dressing and bathing, and provide constant supervision to make sure they do not wander off or harm themselves. None of those costs were covered by Medicare.
For many families, the cost of caring for a dementia patient often “consumed almost their entire household wealth,” said Dr. Amy S. Kelley, a geriatrician at Icahn School of Medicine at Mt. Sinai in New York and the lead author of a paper published in the Annals of Internal Medicine.

As people age their cognitive abilities deteriorate.  Even before they begin to suffer the effects of dementia, they may become forgetful or lose the ability to focus on their finances.  Obtaining the services of a Registered Investment Advisor (RIA) well before this happens – a fiduciary that puts his clients’ interests first – is vital.  And, as people prepare retirement plans, the cost of dementia treatment and care should be one of the things for which they plan.

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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