Retirement

,

VA Aid & Attendance Benefits: Beware of Bad Advice

,

 Imagine this scenario:  You attend a presentation with your father at his assisted living facility.  The organization presenting is very official looking, with materials covered in flags and red, white and blue.  Although they are not the Veteran’s Services Organization or VA, they claim to be able to help all veteran’s get a monthly pension benefit from the VA, no matter what their financial situation.  They claim clients they work with have never been denied benefits.  Could this be true, or might there be a catch?

The U.S. government provides several benefits to military veterans as a way to honor them for their service.  One of the benefits that might be available to many veterans and their spouses in older age is the VA Aid & Attendance Benefit. 

  • Not all veterans are eligible for this benefit, as it is dependent on time of service and medical and financial need.
  •  This benefit provides a monthly pension to veterans and/or their spouses in older age when they begin to need assistance with activities of daily living. 
  • The Aid & Attendance Benefit is also based on financial need – income versus ongoing medical related expenses and value of assets.  In general, anyone with asset in excess of $80,000 is not eligible (note that this asset number can be adjusted based on age and life expectancy).   *Source:  U.S. Department of Veterans Affairs

If a veteran qualifies within the income and assets requirements, applications can be filed with the Veteran’s Services Organization at no cost.  For veterans who might not be eligible for benefits without additional planning, organizations like those described above will offer to assist by re-registering and/or gifting assets and repositioning assets into insurance based products that generate high commissions to the “advisors” selling them and are not necessary to qualify for benefits. 

If you or someone you know is a veteran or spouse of a veteran who thinks they might benefit from the Aid & Attendance Pension Benefit, here are a few things to remember:

  • If the veteran has limited income and assets, go directly to the Veteran’s Services Organization to apply for benefits.
  • If you think you may need additional planning to qualify for benefits, seek out a Certified Elder Law Attorney who has been certified by the VA to counsel veterans.  A qualified Elder Law Attorney will counsel you based on the client’s needs now and in the future (i.e. future need for Medicaid benefits), and may recommend that the VA Aid & Attendance Benefit is not appropriate for all clients.
  • Be aware of advisers who insist that the only way to qualify for benefits is to shift assets to an Irrevocable Trust and fund the trust with insurance based products (be especially aware if the recommendation is to buy multiple, smaller insurance products – as this may not be a suitable option and the advisors may only be trying to maximize their commissions).  The real truth is that if the trust is appropriate, it may not be necessary for it to be funded with insurance products that might have high commissions and might have surrender charges not appropriate for an older adult.

I don’t know about you, but whenever I think about U.S. military veterans, I think of respect, service and gratitude.  The best way to honor our military veterans is to provide them with the most suitable advice for their situation. Not bad advice that will cost them money. If you are a veteran or know one who might be eligible for the Aid & Attendance Benefit, make certain that the appropriate professionals are consulted. 

Watch for my upcoming post on additional Elder Financial Fraud scams.  Contact me at Sandy.Adams@CenterFinPlan.com if you have additional questions about any elder care related topics.

The information contained in this report does not purport to be a complete description of the securities, markets or developments referred to in this material.  Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.  Keep in mind that there is no assurance that any strategy will ultimately be successful or profitable nor protect against a loss.  You should discuss tax or legal matters with the appropriate professional.

,

Women Face Unique Challenges in Retirement Planning

,

 Women today have never been in a better position to achieve financial stability for themselves and their families.  More women than ever are successful professionals, business owners, entrepreneurs and knowledgeable investors.  Growing economic clout and greater financial responsibility highlight the importance of making smart financial decisions along the way. 

And here is the but . . . . they still have a long way to go before closing the male/female retirement savings gap.  In the financial world, women often find themselves in very different circumstances than their male counterparts.  A recent research report from the Insured Retirement Institute says that income disparities over the past 30 years have translated into a 25% to 30% retirement savings shortfall for women baby boomers when compared to men with similar savings and investing patterns.

Income disparities are not solely to blame according to the IRI study.   Besides earning less, women have longer life expectancies than men creating the need to stretch retirement income for a longer period of time.  Another prevailing headwind when it comes to retirement planning is that traditionally women have been more likely to take career breaks for caregiving of family members.  Career breaks can lead to fewer promotions, less savings, potentially lower Social Security income and reduced employer provided retirement benefits.

The solution?   It is critical that women know how to save, invest, and plan for the future.  Here are foundational first steps to help you catch a tailwind and close the retirement savings gap:

1. Chart your financial course every step of the way

Create a budget, manage debt and credit wisely, set priorities

2. Learn basic investing concepts

Asset classes, risk tolerance, time horizon, inflation

3. Understand the role of retirement savings opportunities

401 (k)s, IRAs, and 403 (b)s

4. Before retiring research your Social Security benefit amount

Analyze the options because age, work history, and income earned affect the amount

5. Seek professional help when needed

Increase awareness, implement plans, strategize options

Creating a financial plan and sticking to it isn’t always easy or convenient; however understanding options and implementing a plan helps resolve the tension between what is needed and wanted today and what is needed and wanted for the future.  Closing the retirement savings gap will no doubt push up against the retirement income glass ceiling.   

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Laurie Renchik and not necessarily those of RJFS or Raymond James.

How You Can Ruin Your Retirement Plan With Too Much Optimism

 If you ask most folks who are heading for retirement what their major goals are, you will get an answer something like this:  I hope to maintain my current lifestyle and I do not want to run out of money until I die.  And if you ask them if they will make it, they will most likely say, they think they will.

Yet, the decisions people make may be too optimistic and may actually sabotage those very goals. Let me give you some examples.

  • Taking early retirement packages because they are offered.  If you do this in your 50’s, you have potentially 40 years of income needs. Where is the income going to come from?  Many hope their assets will “hold out”.  Perhaps consideration to sticking with the current job, finding another one for cash flow and knowing if assets will “hold out” is a better plan.
  • Thinking you will live well today and cut back when you are really old.  Catch 22 here.   You may be able to work now but that is not the case when you are 8o years old and need the income to cover inflated expenses and health care costs.
  • Buying too much house with too big a mortgage because houses always appreciate.  Homes are often the biggest investment consumers make but not necessarily the best investment.   Homes have not appreciated much in the past 15 years and many folks have pulled out the equity like they are a bank account.  When selecting a home as you near retirement, consider if you will be able to continue to afford to live in it. 
  • Leasing high priced cars and several of them.  We have been sucked into the “I deserve a nice car” advertisements.   Consumers are enjoying expensive rides, but they are putting out big bucks each month for the pleasure.   Most people know the cheapest way to buy a car is with cash.  If we put on that sensible hat when selecting cars, even when leasing, we might make some very different choices and have money at the end of the month to save toward retirement.
  • Being overly generous to family members when you may not be able to afford it. You are kindest to your family when they don’t have to worry about paying your bills.
  • “I am in great health!”  I do not need expensive health insurance, long term care insurance or life insurance.  It can’t happen to me syndrome is alive and well.  A little hedging with insurance to cover these potential risks is prudent.
  • Last but not least, if I am careful with my investments, I can make at least “X”%. Maybe, but risking your financial future on an overly optimistic number is a disaster. Remember we are talking 30- 40 years of retirement income here.

How do you avoid these pitfalls and yet have a good life today?  You have a financial plan.  A plan is like a road map.  It should help you to get to where you want to go without taking too many side roads.  A plan helps you pick and choose what you want today but plan for tomorrow.  A financial plan is based upon realistic expectations and not hopeful or optimistic expectations.

 

The information contained in this report does not purport to be a complete description of the securities or markets referred to in this material.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.

,

Consumer Alert: Have GM and Ford provided one of the greatest Money Grabs for the Financial Services Industry?

,

 

The automobile industry has played an important role in many Michiganders’ lives. I recall my own great-grandfather Mel working for Ford Motor in Dearborn. Mel was able to provide my great-grandmother and their children (my grandmother) a comfortable middle-class lifestyle thanks to his work there. Today, hundreds of thousands of people—both current employees and retirees--continue to depend upon automobile companies to help care for their families. 

Ford and GM have both recently announced changes to their pension benefits affecting an estimated 130,000 retirees. More of the details are laid out in my two recent blogs (May 4th blog titled “Why is Ford Motor Company Offering to Pay-Off 90,000 Retirees?” and June 13 blog titled “GM Pensions to Follow Ford...With a Twist”), but the essence of the change comes down to choosing between (1) continuing to receive a monthly pension check that will be payable for the rest of your life, and (2) electing to forgo monthly payments and taking a one-time lump sum. 

Consumer Alert: Let’s face it – the financial services industry doesn’t have the greatest track record. Several firms in the financial services industry are already geared up to get their share of the lump sum payments via “free” seminars and “free” consultations. I am sure many of you were given the same sage advice my great-grandfather shared with me one time: there’s no such thing as a free lunch. 

Those in the financial planning industry get compensated in a variety of ways: fees, commissions, or a combination of both. Professionals that provide value deserve to be compensated. However, some advisors in the financial services industry do not get compensated for advising you to continue to take the monthly pension. And yet, this might be the most prudent decision for anyone with a normal life expectancy. 

Financial advisors/consultants/salespeople/insurance agents/stock brokers are often biased for you to elect the lump sum option. A professional financial advisor will start with a clean slate – learn about your unique situation and objectives – and then provide tailored recommendations based on the tradeoffs between the options. Any advisor advocating only one option should be avoided. 

What to do? The tricky situation with the GM and Ford offers is that general rules and rules of thumb just don’t work. You must take a lot of factors into consideration. So, run the numbers (you are encouraged to consult with a financial planner and/or tax advisor) and then weigh the risks before deciding. We have been working with several clients over the last few weeks. In some cases the lump sum offer made the most sense, but in others, we advised sticking to the pension option. Each situation is unique, and we have come to different conclusions based upon their individual circumstances, so make sure you are getting the best advice possible and not just a “free lunch” offer. 

 

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.

,

GM Pensions to Follow Ford...With a Twist

,

  

Much like Ford Motor Company’s recent announcement, GM is making pension offers to reduce their pension liabilities. [See my May 4th blog titled “Why is Ford Motor Company Offering to Pay-Off 90,000 Retirees?”]

Companies like GM usually desire to pay pensions via a lump sum as this can make their balance sheet look better.  Moreover, due to legislation going back to the Pension Protection Act of 2006 (that is now fully in effect), the cost of paying a lump sum for companies has been reduced.

Now the twist: 

GM retirees that elect to continue the monthly pension method will now have their payments “administered” by The Prudential Insurance Company of America.  Administered in this case has a special meaning; checks will come from Prudential and no longer receive the benefit of being covered and insured by the Pension Benefit Guaranty Corporation (PBGC), a U.S. Government Agency (www.PBGC.gov). Rather, annuity payments from Prudential will carry more limited guarantees from each state (For Michigan see www.milifega.org). Fortunately the insurance industry as a whole has been reliable in terms of paying benefits.  In fact, Prudential has never missed paying an annuity payment.  So, there are arguably less guarantees associated with payments from Prudential – but probably not enough to affect the decision in either direction. 

What to do? General rules and rules of thumb just don’t work here.  First, run the numbers (you are encouraged to consult with a financial planner and/or tax advisor) and then weigh the risks before deciding. We have been working with several clients over the last few weeks.  Each situation is unique and we have come to different conclusions depending on their individual circumstances.  If we can help you make an informed and prudent decision – one that has the potential to significantly impact (positively or negatively) your wealth for years to come - please feel free to call or email me.

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.  Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James

Staying Connected – A Key Factor in Retirement Success

 If you ask most pre-retirees to describe their vision of a successful retirement, you would likely hear words such as family, friends, hobbies, and travel.  You would likely NOT hear someone express a desire to be alone and inactive.

Research shows that individuals who experience isolation and inactivity are much more likely to be diagnosed with depression, memory and other health-related problems.  One such study conducted by Lisa F. Berkman, an epidemiologist at Yale University, found that people who were not connected to others were three times as likely to die over the course of 9 years as those who had strong social ties.  Even more interestingly, the same study found that those with strong social ties and poor health behaviors lived longer than those with poor social ties and positive health behaviors. 

An expanded version of retirement planning is needed to look beyond income distribution planning and investment policy statements.  Planning to maintain vital social connections, whether they are family members, friends, church members, dance partners, etc., seems to be just as important to success in retirement as the stability of your investment portfolio.   So as you or your loved ones plan for retirement, think about exploring activities and hobbies, groups and clubs, and consider living arrangements for all of retirement, including early and later retirement.

Contact your financial planner to develop a retirement plan that includes all aspects of your financial life, especially the all-important social connections.

Source:www.hsph.harvard.edu

,

Retirement Headwinds

,

 Do you ever dream of going to work, not because you have to, but because you want to? That’s the number one goal of most Americans over 40. But most financial gurus say that some of the headwinds facing the decision to retire are as daunting as ever.

Consider these Retirement Headwinds:

  • Low portfolio return expectations
    • Lower bond returns: Over time, bonds generally provide long-term returns similar to the coupon percentage they make (i.e. if the coupon of a bond is 5% and held to maturity, you will receive 5% annually until maturity if there is no default).  Interest rates on the 10 year treasury recently went below 1.7%.  This is the lowest yield on the 10 year Treasury in over 50 years.  Since most bond yields are positively correlated with the 10 year treasury, the argument could be made that all yields are lower than their historical average.  According to the Wall Street Journal, rates on the 10 year Treasury touched the lowest yields in modern history.
    • Lower than average stock returns: Historically the stock market (S&P 500) has traded at an average Price to Earnings ratio of 15, but has ranged between 7 and the low 30’s  (Price to Earnings, or P/E is the ratio of a company’s current share price compared to its per-share earnings)  .  Today the P/E is around 12.[i]  If the P/E is contracting (i.e. when the P/E shrinks), the price investors are willing to pay for the combined earnings of the companies trading in the market declines.  This usually results in a decline in the value of the stock market.  This is happening for a few reasons.  One economic study points to the Baby Boomers.  Baby Boomers are entering the stage of life when they generally need to be more conservative.  They may feel that it is no longer suitable to invest in the stock market.    This pool of money that has been added to over the last 30 years now needs to be used.  The largest segment of our population with a sizable amount of investment resources is likely being more cautious and, thus, selling more equities than they are purchasing.  You can read the full FRBSF economic letter here. 
  • Volatility: Markets may continue to move erratically, which tends to cause poor behavioral finance decisions (basically buying high and selling low). This is not new or necessarily worse than before, but still a major challenge for inexperienced investors and advisors.
  • Inflation: Higher inflation may be coming in many different ways.
  • High government debt: As a portion of GDP, government debts can kindle higher prices.
    • Currency devaluation: Low dollar value can cause resources to cost more.  For example, higher oil prices are likely the result of oil sales being denominated in U.S. dollars.
    • Health care costs: People are living longer due to advancements in medical and biomedical technology. Many don't realize the financial burden a few extra years will be for this generation, but it's expensive to be on those meds and have that 2nd hip replacement.
    • Increased tax rates – The debt will need to be paid by someone. You can see some of the new Pension taxes that where just pushed onto retirees in the state of Michigan last year. The extra 4.35% Pension tax adds up year after year. There are more tax hikes coming at the federal level next year, too.
  • Real median personal income: Adjusted for inflation 2010 dollars (as shown by Wikipedia using census data) are flat after inflation over the last 20 years - so it’s been difficult for the average American to save more without changing their lifestyle.

With all these headwinds, surely there are some tailwinds working in our favor? Well, even though I’m a “glass half full” kind of guy, I just don’t see any. So that means investors need to make adjustments to compensate for the headwinds. Coming up in my next blog, I’ll explain some ways to do that.

Bond prices and yields are subject to change based upon market conditions and availability. If bonds are sold prior to maturity, you may receive more or less than your initial investment. Holding bonds to term allows redemption at par value. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James. Past performance may not be indicative of future results. The opinions expressed in the FRBSF Economic Letter are those of the authors and not necessarily those of Raymond James. Diversification does not assure a profit or protect against loss.

 [1] Yahoo! Finance

,

Why is Ford Motor Company Offering to Pay-Off 90,000 Retirees?

,

 On April 27, 2012, Ford Motor Company announced via an internal communication a voluntary lump sum buy-out offer for 90,000 retirees and surviving beneficiaries.   Essentially, Ford wants to pay off or pay out as many retirees as possible.  So why of the sudden generosity?     There are two primary reasons:

    1. To get retirees off the books. Paying lump sums will get the pension liability off of their company balance sheet – which according to Bob Shanks, Ford executive vice president and chief financial officer, will "improve the underlying strength of our balance sheet”. And,

    2. The math looks better in 2012. The Pension Protection Act of 2006 (“PPA”), fully in effect in 2012, allows companies to use the higher yielding corporate bond rate versus the lower Treasury rate when calculating lump sum payments; making the cost of a lump sum lower to employers such as Ford.

Point 2 forces us to further consider how lump sum payments are calculated (for all employers – not just Ford Motor) and its impact on our decision making process.  

How the Math Affects the Company and Retirees

First let me apologize to all of the actuaries (i.e. number crunchers with serious calculators) for grossly underestimating the complexity of the calculation.    Calculating a lump sum takes into account factors such as your specific income, years of service, age, and survivor’s age, if any.    In addition, a “discount” rate is used in determining how much all of the monthly payments (present value) would equal if paid in a single lump sum today.   Why is the discount rate important?

    1. The higher the discount rate, the smaller the lump sum.

    2. The lower the discount rate, the greater the lump sum.

On a relative basis, with general interest rates near historical lows, lump sum payments should be higher than say 10 years ago.  However, the change in the discount rate via the PPA significantly reduces an employer’s lump sum payment obligations – perhaps by as much as 30%. So while Ford has had a desire to offer this type of payout in the past – waiting until 2012 provided a lower cost.

So, let’s agree for the moment that this plan is good for Ford’s balance sheet. However, there is a far more important issue: Is a lump sum good for your finances? Are you better off receiving a one-time lump sum payment rather than guaranteed lifetime monthly payments (guarantees based on For Motor’s ability to continue payments)? What’s good for the company….may or may not be good for you. (I don’t say this lightly – growing up in Dearborn I witnessed firsthand Ford’s exemplary community stewardship). I do however suggest taking a page out of Fords book – run the numbers to see what is most appropriate for you.

Is it good for your finances?

So how much is at stake? Plenty. For example, a 60 year old male entitled to a $2,000/monthly pension might be offered a lump sum close to $600,000 depending upon the actual discount rate used (this is a hypothetical only assuming a single life payment and 3.5% discount rate). Depending upon your unique circumstances this might be a “good deal” – but it might not.

On one side, if you are someone with a long life expectancy and very risk averse you should consider declining the lump sum and sticking with the monthly benefit.    On the other hand, if you are single and not in good health, taking the lump sum might be a better option. As you might expect, most folks will fall somewhere in between these two extremes.

At the risk of stating the obvious, this is a complex and important decision, and you are encouraged to consult with a financial planner and/or tax advisor. Talking with an experienced advisor about your personal situation can help lead to an appropriate decision focused on your balance sheet.

The information contained in this report does not purport to be a complete description of the securities, markets or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.  Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.

Is the Social Security System Bankrupt?

Will future retirees be a part of the largest renege by our elected officials? I am certainly not brave enough to address the political aspects of Social Security in a blog – so today – just the facts.  According to recent data from the Social Security Administration, in 2012 the maximum social security retirement benefit that could be earned by an individual reaching full retirement age (age 66) is currently $2,513 a month or $30,156 per year. Not a fortune, but you certainly wouldn’t pass it up.

As traditional pension plans go the way of the dinosaur, social security and personal investments are left to pick up your retirement income needs.  Although many folks discount the value of social security – the fact is that it provides a larger benefit than most believe (this is not to suggest that social security is a good or bad program – just that the retirement benefits can be significant). Assuming a life expectancy of 20-30 years past retirement age, the present value of the $2,513 a month income stream is roughly $670,000!  Thought of another way, if you needed to generate $30,000 per year from an investment portfolio for the next 20-30 years, you would require investments to the tune of $670,000 (assuming a 4.5% inflation adjusted withdrawal rate). 

As you can see, social security benefits can add up to a significant portion of your total retirement income.

In our next post, we will discuss when to take Social Security Benefits.

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.

, ,

Saving for Tomorrow with TED Talks

, ,

If you haven’t heard of them before, TED Talks (TED stands for Technology, Entertainment, and Design) offer a wealth of inspiration and discussion points. As their tagline says, they truly have Ideas Worth Spreading. At The Center, we regularly discuss insightful TED video talks whether they offer thoughts on personal growth, practice management or investing.

One of my favorite TED Talks was recorded in November 2011 and featured Shlomo Benartzi. Benartzi is an economist in the field of behavioral finance and his work and studies seek to help improve an investor’s chances of saving to meet goals such as retirement. Anyone who thinks that they might need to save for the future – and that should encompass practically everyone – could benefit from viewing this video. 

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of the speaker and not necessarily those of RJFS or Raymond James. Every investor’s situation is unique and you should consider your investment goals, risk tolerance, and time horizon before making any investment decision.

Live YOUR Plan™