This got me to thinking about how many “mud holes” are out there slowing down investor’s retirement plans.  This would include things like excessive fees & commissions, low returns, poor investment decisions, inflation, market volatility and unnecessary taxes.

If fact, I just had a conversation the other day with one of my clients who told me about a mud hole that another adviser had created for her.  The adviser had been managing some money for her invested in dividend paying stocks that were supposed to reduce her risk and generate income.  In 2011, the account lost over 16%!  I was shocked!  How’s that for low risk?!  When we compared that to the way her portfolio with me was performing, which actually made money this year, her comment really hit me.  She said, “I will think long and hard before I ever let anyone but you manage money for me.”  I really makes me feel good to know that I’m helping my clients make money AND take less risk than the market.  With the difficult times ahead that this country is going to be facing, no one can afford to be losing money like that.

How did we do it you ask?  Well it doesn’t happen by accident.  Over the last 16 years I’ve developed a strategic method of investing designed to lower volatility and protect against inflation.  I don’t use any kind of risky derivatives or options or anything like that.  And my clients money is liquid, easily accessible if they ever want or need it.

If you would like to discuss how I can help you protect your assets from the wild swings of the market, and stay ahead of inflation (which is likely to get ugly), then please call me.  My toll free number is 1- 866-983-4222. I will offer you a complimentary review of your current portfolio and show you how we can help you eliminate and avoid the worst proverbial “mud holes” that face investors like you.  Don’t live with retirement plan “mud holes”.  These can be fixed with a little time and effort.  Some are much easier to get rid of than others.  And chances are, it won’t COST you anything to fix these problems in your retirement plan, it will likely SAVE you money and increase your retirement assets in the end.

The problem is that inflation eats away at the purchasing power of retirement nest eggs.  Over the course of 30 years (a very likely retirement period these days), a 3.5% inflation rate will cause today’s dollar to buy about 36 cents worth of goods.  To look at it another way, someone who can live today on $50,000 a year would need about $140,000 a year 30 years from now (if inflation holds at that pace).

Lately, the Consumer Price Index (CPI), the most common measure of inflation in this country, rose to 3.6% annually in July.  That’s above the historical average, and worries many experts that it could discourage the Fed from too much more stimulus for the economy.

With no cost of living increases in Social Security checks over the last two years, many retirees are beginning to feel the pinch of what rising costs can do to someone on a fixed income.

The truth is, the CPI measurement of inflation may not be realistic for some people.  People in retirement years often spend more than average on healthcare.  The cost of medical care only accounts for 6.6% of the CPI index.  At the beginning of retirement, healthcare accounts for about 25% of your essential expenses, and near the end of retirement if can account for almost 50% of your essential expenses.  As you get into the later years of retirement you tend to spend less on other things like travel, entertainment, transportation & clothing, so you still need to plan on at least a 3% overall inflation rate.

The good news is, there are ways to hedge your portfolio against the inflation enemy.  Things like stocks, real estate and commodities have historically outperformed inflation.  More recently, inflation protected bonds have also helped investors stay ahead of rising costs.  Many fixed and variable annuities now offer riders that automatically boost income payouts to policyholders each year.

The bottom line is, you need to plan on doubling or tripling your income over a 30 year retirement, even with modest inflationary numbers.  This can definitely be done with some careful planning, and by using a diversified approach to allocating your nest egg.  Working with a competent financial planner will help you accomplish this.

by Susan B. Garland
Monday, August 29, 2011

The death of a spouse is one of the most devastating events of a person’s life. To make matters worse, at a time when you feel incapable of dealing with life’s routines, you’re slammed with an avalanche of financial tasks that require immediate attention. This can be particularly stressful if the surviving spouse, usually the wife, did not play an active role in the household finances.

But despite the pressure to do so, this is precisely the wrong time to make major financial decisions. If you act precipitously, you may make costly mistakes that will be tough to unwind later. “I tell my clients that they should be in a decision-free zone for six months to a year,” says Karen Folk, a certified financial planner in Urbana, Ill.

Don’t put your house on the market. Don’t give away money to your children or charity. Don’t sell stocks or bonds. And don’t agree to move in with an adult child, says Folk. Eventually, any of these steps may make perfect sense. But take a breather in the overwhelming weeks and months after a spouse dies.

One other no-no: Don’t allow a salesperson to talk you into buying financial products, such as an annuity or life insurance. “Ambulance chasers will catch you when you are vulnerable,” warns Kathleen Rehl, a certified financial planner in Land O’Lakes, Fla. Rehl wrote “Moving Forward on Your Own: A Financial Guidebook for Widows” (Rehl Financial Advisors, $20) after the death of her husband in 2007. To drive home her point, Rehl recounts the story of a widowed client who was paid a visit by an insurance agent. The agent came to deliver the proceeds from her husband’s life insurance policy, and he persuaded her to sign over the check for a new policy that she did not need.

A case in point for not making big decisions soon after a spouse’s death is Maureen Saunders. The financial chores following the death of her husband, Hubert, from pancreatic cancer in 2006 at age 65 were crushing enough. Although Saunders, now 58, balanced the checkbook, her husband was the main financial decision-maker, especially when it came to investments. His death left her “in uncharted waters, not only emotionally and spiritually but also financially.”

Saunders had to wrangle with the life insurance company, which didn’t believe she was her husband’s beneficiary. She had a “total meltdown” in the bank when she discovered, after bouncing some checks, that the Social Security Administration had rescinded Hubert’s latest direct-deposit benefit payment. She proved that her husband died after the deadline to be eligible for that month’s payment, but it took weeks for the government to return the money. She did not realize that she would not be eligible for a survivor benefit until she turned 60. “You’re so vulnerable and raw, and there is always another form to fill out,” says Saunders, who lives in St. Petersburg, Fla.

The checklist below can help surviving spouses figure out which tasks to address early on. The tips apply to husbands and wives.

Gather the documents. If your late spouse ran the household finances, it would be great if he left behind an organized filing system as well as all the passwords you need to access computer files. But if you need to dig through the piles yourself, Rehl recommends starting a filing system using colored manila folders. Among the headings: banking, bills, credit-card statements, taxes, life insurance policies and estate documents.

You’ll need to gather Social Security numbers, birth and marriage certificates, military discharge papers, company benefits booklets, car titles, powers of attorney, and current statements for bank, brokerage and retirement accounts. Get 10 to 25 copies of your spouse’s death certificate. The funeral director can help with this. Many financial institutions require a death certificate to close an account or to change ownership of investments.

You’ll need the certificate to transfer title on real estate and to claim life insurance and veterans benefits. Make sure to pay your bills for credit cards, utilities, car loans, property tax, insurance premiums and the mortgage. You could incur late charges if you let these tasks slide. (If you are hit with such charges, ask for a waiver due to the circumstances.) Notify Medicare and other health insurance companies that you will no longer pay your spouse’s premiums. Also cancel club memberships and magazine subscriptions that you don’t need. Explain the situation and you may get a partial refund. Folk suggests that you keep a joint checking account for at least a year. “Occasionally, odd checks to the deceased spouse come in,” she says. “If you close or retitle the account, there won’t be a place to put them.”

Get some help. Charles Simon, a certified financial planner with Taconic Advisors in Poughkeepsie, N.Y., suggests creating a “financial support team.” The group could include an accountant, a lawyer, a financial planner, and a trusted friend or family member who has good financial skills. “In the first six months, you’re in a state of shock,” says Simon, a widower who counts many surviving spouses among his clients. “Your team can help you when you’re least able to attend to details.”

Before Veronica Cavalla’s husband, Peter, died in 2008 at age 68, he managed part of the couple’s investments while a broker handled the rest. Cavalla, 64, says the broker wanted to take control of more of the investments, so she began initialing documents. She didn’t know what she owned. In addition, the new widow couldn’t follow her lawyer’s instructions to retitle property or take other steps to prepare the estate for probate and estate taxes. “Part of my problem was that I was so embarrassed because I didn’t know what people were talking about,” says Cavalla, who lives in Poughkeepsie and recently retired as a registered nurse. “Unless it was a simple matter, I avoided it.”

Eventually, Cavalla’s frustrated lawyer recommended that she see Simon, a fee-only planner who helped her plow through the paperwork. “I should have hired him right away,” she says. If you need to find a fee-only planner, contact the National Association of Personal Financial Advisors (www.napfa.org; 847-483-5400).

Assess your cash flow. While you should postpone big financial decisions, you should take stock quickly of your expenses and income. Make a list of your income sources: Social Security, pension payments, dividends, interest, job earnings and IRA distributions.

Write down your fixed expenses, such as groceries, mortgage payments, utilities and insurance. “Look at your checkbook to see if there are recurring payments on your credit card,” says Simon. Check your deceased spouse’s check register, too. Make a separate list for your discretionary costs, such as gift s and travel.

Some income payments may decline. For instance, if your husband was receiving a Social Security benefit and you were getting a 50% spousal benefit, the spousal benefit will disappear. But some expenses will end as well, such as your spouse’s Medicare premiums.

If you are short on cash, start chipping away on the discretionary spending. “I used to have a 32-foot boat,” says Saunders. “Now I have two kayaks.”

Rehl says new widows should build a reserve for one to two years of expenses in a liquid account, such as a bank money-market account. “Widows worry, ‘Will I be a bag lady?’ ” Rehl says. “With a liquid account, no matter how the market is going, they will feel secure.”

Collect life insurance benefits. If you can’t find the life insurance policy and you don’t have an agent, go through checkbook registers and canceled checks to see if there were any checks written to an insurance company. For a fee, the MIB Solutions’ Policy Locator Service (www.policylocator.com) might help you find the application. Your spouse also may have had a group policy through an employer or former employer or professional or fraternal organizations.

When you file a claim, you may have choices regarding how you will receive the money. Read the fine print carefully. In some cases, an insurance company will place your funds into its own money-market funds and send you a checkbook. Turn down this option, and then place the money in a federally insured bank account or a money-market fund. If you’re instead considering guaranteed monthly payments for life, seek the advice of your lawyer or financial adviser.

Prepare the estate. Until you meet with your estate lawyer, hold off on placing your spouse’s assets in your own name, says Wynne Whitman, an estate lawyer with Schenck, Price, Smith & King, in Florham Park, N.J. If you touch assets in your spouse’s name, you’ll lose any opportunity to “disclaim” the property — that is, allowing those assets to go directly to your children or other heirs. If you forgo these assets, they will not count against your federal or state estate-tax exemption when you die.

You have nine months from the date of your spouse’s death to file a federal estate-tax return. Some states have earlier deadlines for filing returns for state estate and inheritance taxes.

Whitman suggests that you save all receipts related to the estate, especially if the estate’s value is close to or exceeds the estate-tax exemption. “The funeral is a legitimate expense and so is a post-funeral gathering,” says Whitman. “You will need every single deduction.”

Assuming you had named your spouse to make financial and health-care decisions on your behalf in the event you became incapacitated, you will need to designate a new agent for your financial power of attorney, health-care power of attorney and health-care directive.

Check with the employer. If your spouse was employed at the time of his death, call the benefits administrator to ask about benefits due to you. Besides life insurance, these can include unpaid salary and bonuses, accrued vacation and sick pay, left over funds in a medical flexible spending account, and stock options.

You’ll also need to check on pension benefits. Assuming your spouse was retired and you were both receiving monthly pension benefits in the form of a joint and survivor annuity, notify the plan administrator immediately, says Rebecca Davis, a lawyer with the Pension Rights Center, in Washington, D.C. Depending on the type of annuity you chose, you could be due 50%, 75% or 100% of what both of you were receiving before your spouse died. “If you have a 50% option and the plan keeps paying the 100% benefit, it could expect you to send back the overpayment,” says Davis.

If your spouse had a 401(k), it makes the most sense to roll the account into an IRA — assuming you get the go — ahead from your estate lawyer. If your spouse still had accounts from former employers, consolidate them into one IRA. The custodial firm that holds your IRA can help with the paperwork.

The 401(k)-to-IRA rollover can be dicey. Ask the 401(k) administrator to make a direct transfer to the IRA. If the plan instead sends you a check, get it into the IRA within 60 days. If you miss the 60-day cutoff, the IRS will consider the money to be a withdrawal and you will pay tax on the entire amount.

If you were receiving health coverage under your spouse’s employer plan, you may be able to continue on the group plan for 36 months through COBRA coverage. (An employer with fewer than 20 employees is not required to provide COBRA coverage.) Ask the plan administrator if the company will continue picking up the employer’s premium subsidy.

Roll over an IRA. If you are the only beneficiary of your spouse’s IRA, you can roll the retirement plan into your own IRA tax-free. (There are other steps you must take if you are one of several beneficiaries.) Before doing so, make sure your spouse, if he was 70 1/2 or older, took his required minimum distribution before he died. If he didn’t, you must take his RMD by December 31 in the year he died or pay a penalty.

In the following years, after you’ve rolled the plan into your own IRA, you can skip distributions until you’re 70 1/2, allowing the account to grow tax-free. Once you turn 70 1/2, your required distributions will be based on your life expectancy.

It may be wise to forgo a rollover if you’re younger than 59 1/2 and need to tap the account. By leaving the account in your spouse’s name and remaining as a “beneficiary,” you will not pay a 10% penalty on any withdrawals. After you turn 59 1/2, you can roll the account into your own. If your spouse left you a Roth IRA, you can claim the Roth IRA as your own, in which case distributions are never required during your lifetime.

Claim a Social Security benefit. A widow or widower is entitled to a survivor benefit that is equal to 100% of the deceased spouse’s benefit, as long as the survivor waits until full retirement age to collect. You can collect a survivor benefit as early as 60, but your benefit will be permanently reduced a bit for each month you claim before your full retirement age. (It’s reduced by 28.5% if you claim at 60.)

If you were collecting a spousal benefit, you can “step up” to a survivor benefit. At that point, the spousal benefit will disappear. If you are younger than full retirement age and decide to wait to claim the full survivor benefit, you will stop receiving the spousal benefit. If your husband dies before claiming a benefit, you will be eligible for a survivor benefit equal to the benefit he was entitled to at the time of his death.

As summer reads go, it might not prove to be as interesting as “A Dance with Dragons” or “ESPN: Those Guys Have All the Fun.” But for gurus and nerds (like me), it’s pretty darn close.

 Yes, retirement-focused (some might say retirement-obsessed) folks are spending their summer days and nights, and in some cases their vacations, combing through the just-released 2011 edition of “Fast Facts & Figures About Social Security” in search of whatever insights can be gleaned about the current state of retirement in America, and what, if any, items we can put on our collective to-do list.

And the latest edition, which answers the most frequently asked questions about the programs the Social Security Administration (SSA) administers, doesn’t disappoint. The book, among other things, highlights basic data for the Social Security (retirement, survivors and disability) and Supplemental Security Income (SSI) programs.

Here’s what experts say you should do or consider given the facts and figures in the 2011 version of this “book,” which is published by the SSA.

Read the report, “Fast Facts and Figures About Social Security, 2011.”

Social Security is a major source of income for older Americans

It might not come as a surprise, but the first item of note is this: About one in every five Americans, or nearly 60 million people, receive some type of benefit or assistance from Social Security. And about 80% of those beneficiaries are age 62 or older. And for those beneficiaries, it’s an especially important source of income for older Americans.

Consider: In 2009, Social Security represented 38% of all income going to Americans aged 65 and older. That’s up eight percentage points from the 30% in 1962.

“Workers tend to dismiss Social Security as a major source of their retirement income,” said Andy Landis, author of Social Security: The Inside Story, 2011 Edition and the founder of Thinking Retirement. “The data say not so fast. Social Security represents the largest source of their income. Social Security provides more income than any of the other legs of the retirement stool — more than earnings, savings or pensions. Workers need to wake up to the reality that Social Security is vital for their retirement finances.”

Others, including Jason Fichtner, Ph.D., a senior research fellow at the Mercatus Center at George Mason University, are of the same opinion. He noted that 66% of all beneficiaries now rely on Social Security for 50% or more of their income in retirement, while 35% rely on benefits for 90% or more of their income.

For non-married beneficiaries, which includes widows and widowers, the numbers are even more staggering, Fichtner said. Some 73% rely on benefit payments for 50% or more of their income and 43% rely on Social Security for 90% or more of their income. See the chart on page 7 of Fast Facts & Figures, which shows the percentage of aged units receiving Social Security benefits, by relative importance of benefits to total income relative importance of Social Security benefits. (In addition to that chart, Fichtner said he tends to focuses on three other charts when reading Fast Facts & Figures: Receipt of Income, 1962 and 2009; Shares of Aggregate Income, 1962 and 2009; and Relative Importance of Social Security, 2009.)

Not surprisingly, a spokesperson for AARP, the lobbying group for older Americans and which recently called on Congress to protect Social Security benefits, had these observations about Fast Facts & Figures: “The report shows that Social Security is the single greatest source of aggregate income for retirees, and represents a greater share of aggregate retirement income today than it did in 1962,” said Cristina Martin-Firvida, AARP director of Financial Security and Consumer Affairs.

By contrast, she said the share from earnings in 2009 is about the same as it was in 1962, and the share from asset income is lower (15% in 1962 and 11% in 2009). “Undoubtedly, an unpromising job market, depressed housing values, and an unstable equities market have all made retirement today less financially secure,” said Martin-Firvida. “This data underscores the critical importance of maintaining the earned, guaranteed and inflation-protected benefit that Social Security offers Americans in retirement.”

Earned income is a big source of income too

While Social Security represents a large percentage of total income for older Americans, earned income is an important source of income as well. In fact, at 29%, it represents the second largest source of total income for Americans aged 65 and older in 2009. The odd thing about earned income, however, is that the percent of total income that earnings represented in 2009 is about the same as it was in 1962.

But those numbers don’t tell the whole story. According to Fichtner, the percentage of ‘aged units’ (basically those age 65 or over) that report receiving ‘earnings’ was only 26% in 2009, down from 36% in 1962 — while the percentage of people 65 or over receiving Social Security has rapidly increased to 87% in 2009 from 69% in 1962. “What this tells you is that Social Security benefits are now a universal income source for those Americans age 65 and over,” he said. “And, it’s a very important source of income to keep people out of poverty.”

Not all that big a benefit

While Social Security represents a large percent of income for older Americans, the actual amount of the benefit seems somewhat small, according to Alicia Munnell, the director of the Center for Retirement Research at Boston College. The average Social Security benefit amount for new awards in 2010 was $1,193 per month, or $14,316 per year according to Fast Facts & Figures.

According Janet Barr, the chairperson of the American Academy of Actuaries Social Security Committee, Americans preparing for retirement should take the time to learn how their Social Security benefit could be affected by the decision of when to retire.

By delaying retirement, the Social Security benefit amount goes up due to additional earnings and years of service, Barr said. It also increases because an early retirement reduction is not applied (5% or 6.66% per year before Normal Retirement Age or what some call Full Retirement Age or FRA).

In cases when retirement is delayed beyond the Normal Retirement Age, a delayed retirement credit also increases the benefit amount (8% per year after Normal Retirement Age), she said.

“Waiting a few years to retire could provide a 25% increase in benefit, which would boost a $1,200 per month benefit to $1,500 per month,” said Barr.

No increase in OASI filings

The economy is down and the unemployment rate is still high. But the number of people applying for Social Security is flat, according to Landis’ read of Facts & Figures.

“One thing that surprised me is that the number of OASI (The Old Age Survivors Insurance, meaning retirees and survivors) claims were the same in 2009 and 2010 (4.7 million in both year),” said, Landis. “I would have thought with all the unemployed, more people would be filing for retirement. Not so. The data show that retirement-age workers are hanging onto their jobs rather than retiring and filing for Social Security — perhaps a fair measure of financial readiness for retirement, or lack thereof.”

Disability claims and SSI public assistance claims are up

On the contrary, Landis noted that disability claims are up, as are SSI public assistance claims. And to some, including John Laitner, the director of the University of Michigan Retirement Research Center, that spells trouble.

The Old Age Survivors Insurance (OASI) fund, from which retirement benefits are paid, continues to grow modestly, Laitner said. The OASI fund is expected to grow from $2.4 trillion in 2010 to an estimated $2.5 trillion in 2011. (See page 3 of Facts & Figures.) But the Disability Insurance (DI) trust fund is shrinking, and has reached a very low level. The DI fund is expected to fall from $180 billion in 2010 to an estimated $154 billion in 2011.

What’s more, disability awards have grown faster since 1970 than those for retirees, Laitner said. The annual number of awards to disabled retired workers rose from 1.3 million in 1970 to 2.6 million in 2010, while for disabled workers it increased from 350,000 in 1970 to 1 million in 2010. And if that wasn’t bad enough, the average age of retired beneficiaries has risen slightly since 1960, but the average age of disabled beneficiaries has fallen.

According to Facts & Figures: “The average age of disabled-worker beneficiaries in current-payment status has declined substantially since 1960, when DI benefits first became available to persons younger than age 50. In that year, the average age of a disabled worker was 57.2 years. The rapid drop in average age in the following years reflects a growing number of awards to workers under 50. By 1995, the average age had fallen to a low of 49.8, and by 2010, it had risen to 52.8. By contrast, the average age of retired workers has changed little over time, rising from 72.4 in 1960 to 73.7 in 2010.” (See page 17.)

Said Laitner: “In my opinion, long-run concerns about the financial solvency of both OASI and DI are warranted, but between the two, DI seems to raise the most immediate alarm.”

Elderly households not slipping behind

After correcting for inflation, both married couples and singles in 2009 have roughly double the income of those aged 65 and older in 1962. According to Facts & Figures, the median income of a married couple aged 65 or older was $43,114 in 2010, up 111% from $20,424 in 1962.

By contrast, wage growth has lagged in past decades, said Laitner. According to the Economic Report of the President for 2011, average wage and salary income for 25-65 year old college graduates rose, after correcting for inflation, 60% from about $50,000 in 1963 to about $80,000 in 2009. And that high school graduate wage and salary income showed almost no gain for the same period.

“We all wish that economic growth could be faster,” said Laitner. “Nevertheless, the data offers some reassurance that elderly households are not slipping behind younger households in a difficult period.”

More than a retirement program

Another often overlooked fact about Social Security is that it’s much more than a retirement program, said Munnell. “Some 31% of benefits go to those under 62,” she said.

Here’s the breakdown according to Fast Fact & Figures: There are more than 54 million beneficiaries in current-payment status. And 64% of those beneficiaries were retired workers and 15% were disabled workers. The remaining 21% were survivors or the spouses and children of retired or disabled workers.

Room to raise the maximum annual wage base

Experts often recommend a combination of increasing taxes and lowering benefits as a way to save Social Security from going bankrupt. And one of the ways to increase taxes has to do with maximum annual wage base subject to Social Security tax. For 2011, the wage base subject to Social Security tax is $106,800, which is the same as what it was in 2009 and 2010.

Given his read of Facts & Figures, Landis figures Uncle Sam has some leeway to raise the maximum wage base. “One issue being discussed today is the growing wealth gap between the top quintile and all other quintiles,” said Landis. “The Social Security taxable earnings ceiling — $106,800 this year — sheds some light here: It has not kept pace with higher incomes. Currently about 84% of all earnings are taxable for Social Security, trending steadily downward from 89% in 1990. That leaves some ‘headroom’ to raise the earnings ceiling to capture more earnings, strengthening Social Security’s solvency.”

The payroll tax gift

One other item of note about Fast Facts & Figures is this: The publication reports that the Social Security payroll tax is normally 6.2% for OASI and DI combined. A special provision has lowered this to 4.2% for 2011. Said Munnell: “The employee payroll tax is 2 percentage points lower than employer (for 2011). Does everybody know they’re getting a tax cut?”

In other words, keep on working. “Actuaries and other retirement experts suggest that those close to retirement might want to continue to work in 2011 to take advantage of the lower tax rate,” said Barr. “Their Social Security benefit amount will not be impacted by the lower tax rate since general revenue reimburses Social Security for the lower tax rate.”

Longer life expectancy

Social Security actuarial studies show that Americans are living longer after reaching age 65 than they have in the past. “Because of this, actuaries have said that we need to either save more for retirement or work longer than we have in the past,” said Barr, who also noted that the American Academy of Actuaries often points to the traditional model of a three-legged stool for a secure retirement — Social Security, employer-sponsored plans and personal savings. “All three elements need to work together to support a longer life expectancy,” she said. “Retirees should not rely on only one leg of the stool to support their entire retirement. As you said, this means they may need to consider working longer or saving more.”

Since 1971 the life expectancy of the average 65-year-old in the U.S. has improved 4 to 5 years.  By 2050, forecasts suggest, they will add another three years on top of that.  Until now, people have converted all that extra lifetime into leisure time.

Trying, but not hard enough

Living longer and retiring early may not be a problem if there were an increasing supply of workers.  In 1950 there were 7.2 people working for each person age 65 or older.  By 1980 that ratio had dropped to 4.1.  Declining fertility rates imply that by 2050 there will only be 2.6 American workers supporting each pensioner.  There won’t be enough young workers to keep the already troubled system going.  Economic growth is a function of the size of the workforce, the amount of capital employed and the rise in productivity.  If the workforce shrinks, as domography shows it will, all the growth will have to come from capital investment and productivity improvements.  In Japan, where the working population is already getting smaller, economic growth has been miniscule, despite a good productivity record.  To counteract a shrinking workforce, retirement age will need to be raised.

There are some advantages??

Working longer does have three advantages (if you want to look at it that way).  1.  The employee gets more years of wages and can save more money.  2.  The government receives more in taxes and pays out less in benefits.  3.  The economy grows faster as more people work longer.  Yet many people worry that if workers stay longer, there won’t be enough jobs to go around.  Others have concerns that older workers aren’t as productive as younger workers.  But in a knowledge based job, this isn’t as big of an issue.  Older workers have more experience and, by and large, better personal skills.  Even so, pay will need to reflect productivity.  Traditional pay based on job seniority and time on the job will likely need to change.

Pension problems

In the private sector, the pension problem is being dealt with.  Rarely are new employees ever offered a pension anymore.  But in the public sector, pensions are still a common benefit for most.  The deficits in our public pension system here in America amount to $3 trillion.  Legal and constitutional constraints prevent the government from changing what has already been promised.  But as this problem worsens, politicians are going to have to do something to change laws and constitutions.

I would welcome your comments on possible solutions to this increasing the retirement age issue.

On more basic financial matters, average answers showed more promise.  Eighty-eight percent of the respondents knew the definition of diversification, 79 percent knew asset allocation, and 57 percent knew dollar-cost averageing.  And nearly 80 percent of survey takers strongly agreed with the importance of understanding their own financial situation – ranking 7 or higher on a scale of 1 to 10.

In conjunction with the study, Northwestern created a brief 14 question online quiz that you can take at http://www.financialmattersquiz.com and test your own knowledge.  It’s a little heavy on insurance related topics (which makes sense because Northwestern Mutual is an insurance company), but it’s pretty good.

“We know from this study that most Americans want to be financially self-sufficient, and are focused on preserving their lifestyles and protecting against uncertainty,” explains Dave Simbro, Northwesters Mutual vice president – life products.  “This desire makes improving our nation’s financial literacy especially relevant, and we believe the first step is an honest assessment of one’s personal finance proficiency.”

In another study done by Metlife, 53% of more-affluent Americans (investable assets of at least $200,000) believe the help of a professional financial advisor is required when planning for retirement.

It’s interesting that 69% of the American population can’t pass a financial products & concepts quiz, yet only about half of the population feels they need the help of a financial professional. 

If knowledge of financial products and concepts is not your area of expertise (and that’s OK if it’s not), call us today for a no-cost, no-obligation appointment.  We’ll review your current financial situation with you and help you see if you might benefit from the help of a professional advisor.

We all want to retire early. Rule 72t may be the answer.

Some of you out there may be interested in how to retire early using Rule 72t, or 72(t) of the internal revenue code. As you all know, if you take money out of your 401k or other tax-deferred retirement accounts prior to age 59 1/2, you will not only be taxed on that distribution as ordinary income, but you’ll also pay an additional 10% penalty tax on top of that.  After you add on state taxes, you could end up losing more than 1/2 of your withdrawal to taxes.

Rule 72t provides an exception to the 10% penalty tax so that you can avoid it, as long as you follow some straitforward guidelines in taking these early withdrawals.  Another name for Rule 72t is “substantially equal periodic payments (SEPPs).

The requirements for taking SEPPs are fairly simple.  You can begin taking SEPPs out at any age, but you have to continue taking out the same amount (at least annually) for at least 5 years, or till age 59 1/2, whichever comes later.  You have to make sure you do the following things:

• You need to take out the payments at least once per year
• The payments much be calculated according to one of the IRS-approved methods for determining SEPPs
• You cannot make contributions, transfers (in or out) or rollover into the account from which you are taking SEPPs, nor can you take extra withdrawals from that account.

While these 72t rules are fairly simple, the penalties for not following them are severe.  If you don’t follow these rules, the entire amount that you take out prior to age 59 1/2 may be subject to a retroactive application of the 10% early withdrawal penalty, plus interest.

What are the IRS-approved calculation methods?

There are 3 IRS-approved methods for calculating SEPPs, or 72t distributions.  Keep in mind that once you choose a method of calculation and determine a payment, you cannot change that withdrawal amount for 5 years, or until age 59 1/2, whichever comes later.

Amortization method

The amortization method requires that a “reasonable” rate of interest* be used in the calculation.  Using your retirement account balance (generally as of 12/31 of the year before you start the 72t plan) and the account owners single life expectancy (or joint life expectancy of the account owner and a beneficiary) taken from IRS life expectancy tables, this method calculates the equal payments that can be taken.

Annuity method

Using the annuity method, distribution amounts are calculated by dividing the retirement account balances by an annuity factor based on the account owner’s single life expectancy and a reasonable rate of interest*.  This method essentially turns your retirement account into a lifetime stream of income payments.  Like the amortization method, these 72t payments must remain the same from year to year.

MRD method

The MRD method recalculates your payment every year.  The annual payment is generally the 12/31 account balance divided by the life expectancy from the applicable IRS Life Expectancy Table, based on your age or the age of your beneficiary.  Because the MRD method recalculates the distribution amount every year, this method reacts to teh changes in your overall account balance, so you are less likely to rapidly deplete your account if the balance has dropped due to market decline.

*Note:  IRS guidance provides that the interest rate that may be used is one that is not more than 120% of the federal mid-term rate for either of the two months immediately preceding the month in which payments begin.

If you think you might like to use a Rule 72t distribution to help you retire prior to age 59 1/2, it is very important that you consult a professional financial planner.  You don’t want to make a mistake in how you set this up, the IRS will punish you for it.  Call us today at 1-866-943-4222 for assistance in setting up a 72t plan.

I saw a look of relief similar to the miners families as these clients realized the position that they were in.  Neither one was being forced to retire, but both were at that stage in life where they were getting real tired of having to go to work every day (wait a minute, aren’t most people at that point?).  Other things were now more important to them than pursuing that career.  These meetings are a real pay day for a financial planner when you can look a client in the eye and tell them with confidence that they can say goodbye to the corporate whenever they are ready.

What do they have in common?

I always like to ask my clients what their secret to success is.  I pretty much hear the same things over and over.  What I often hear are the following:

• they consistently spend less than they earn (not easy to do, requires a lot of sacrifice)
• they try to get out of debt as soon as possible (again, not easy to do)
• they started investing at a fairly early age (takes discipline to develop this habit)
• they save up and pay cash for things like cars, boats, etc. (more discipline and sacrifice)
• most of them make the majority of their money in the last 10 yrs of their career (didn’t happen overnight)

Hats off to the Chilean miners, to their families who have been living on edge for two months, and to the rescue team that brought them home.  And hats off to anyone who has been living disciplined enough to be able to retire and stay retired.  If you’re not there yet, don’t worry, you will be if you will follow the example of those who have done it.  It’s not easy, it takes discipline, it takes time to get to that point, but it can be done.  I love a story that has a happy ending like that.

This is a close up of a bed bug after it's fed on you for the first time. They turn red with your blood. Pretty gross huh?

This is the same bed bug as the one above, but shows you just how small they really are. You can barely see it!

Another perspective picture to show just how small these little pests are.

As you can see, bed bugs are very small, but they are visible to the naked eye if you are looking for them.  However, the irritation and discomfort that bed bugs cause is very easy to see and feel.  Chances are that you’ll know you have them before you ever see them.    Here’s what the bites can look like:

A leg covered with bed bug bites...ouch!

Bed bug bites are very painful and itchy, and are often mistaken for mosquito bites or pimples.  They also can look very different from person to person, which is another reason why they can be so hard to diagnose.

I also learned that once you find out you have bed bugs, they are very costly to get rid of (upwards of $1500).  The extermination process is different from getting rid of other pests like spiders or cockroaches, etc.  And it is highly recommended that you hire a professional to do the job.  Other alternatives are:  1.  Throwing your infected beds, couches and chairs out the window and hoping that the bed bugs all go with them, or:  2.  Living in misery with your bed bugs and all their bites as they feast on you each night.

For more information on bed bugs, how to diagnose them, and how to get rid of them, visit www.how-big-is-a-bed-bug.com

OK, so by now you’re probably squirming in your chair and maybe feeling a little something crawling on your leg, back or neck.  Now that I’ve got your attention, what the heck does this have to do with personal financial planning?

Many of us have little FINANCIAL  bed bugs crawing around wrecking havoc on our personal financial plans.  They can be small and hard to notice, yet they can cause enormous amounts of pain and suffering for you and your family.  The key to getting rid of them is knowing what to look for, and knowing what the symptoms are, and only then do you have a good chance identifying the problem and getting rid of it.

Here’s a short list of just a few of the financial planning bed bugs you might have:

• Investment fees that are too high
• Advisor fees that are too high
• Paying more than you should in taxes
• Paying more than you should for health insurance
• Over spending your bank account
• Not saving enough for retirement
• Not having the appropriate estate planning documents in place
• Not having enough life insurance
• Having too much money at risk in a volatile market

Like I said, this is just a short list to get you started, and I could go on for pages.  Having any one of these problems can and will greatly disrupt your retirement income plan.  Just like with actual bed bugs, getting rid of financial bed bugs often requires the help of a professional.  A CERTIFIED FINANCIAL PLANNING (TM) professional is well equipped to help you identify exactly what is causing your financial pain, and then getting rid of the problem.

If you have been feeling uneasy about your financial situation, or wondering if you might have some of these hard-to-see problems, please call us today.  We will be happy to give you a no-obligation consultation of your situation, and make a diagnosis.  Sometimes just having a second opinion from an expert is all you need to confirm what you already suspected.  Most times we can also find many other problems that you never knew you had.  Having a professional on your side who is committed to helping you rid your financial plan of anything that is throwing it off course is invaluable.  A competent advisor such as this will help you create, and stick to a plan that will ensure your success.  Call us today for an appointment at 1-866-983-4222.

If you shave your own hair at home vs. going to the hair salon/barber each month, you’ll save at least $15 (assuming your a man).  Add to that the cost of shampoo, gel, hair spray, mouse, hair dye or whatever other hair products you use, that’s another $5.  So if you save an extra $20 per month for 20 years, and it grows at 7% per year, that adds up to $10, 418.  That’s nothing to laugh at, even if you do have a funny shaped noggin.

So maybe the shaved head is not for you (although your wife might like it).  But there are tons of little ways we can all save extra each month.  And little bits of savings add up to big numbers over time.  Here’s a chart showing what you could accumulate if you save these amounts, and grow them at 7% per year:

HTML Tables

OK, so I don’t REALLY think that everyone should shave their heads.  I just wanted to get your attention.  What I do think is that everyone can find one or two ways to save a little extra money each month.  And whether you put it towards retirement, or college, or that ski condo you’ve always wanted, you’ll be glad you made the sacrifice in the end.  It’s never too late to start saving!

But in case you are interested in joining the hair-free ranks, there are some cool specialty razors out there like the HeadBlade from www.headblade.com

If you have a money saving tip that others might enjoy, please submit it below in the Reply section.

Have a great day!