Ford Pension Decision – Find Out What Really Matters

 Back in May 2012, Ford Motor Company announced plans to offer pension lump sum buy out payments to 90,000 retirees (see my blog).  Not to be outdone, General Motors announced a similar program shortly thereafter (see my blog).   As our firm began to see many in the financial services industry swarm to get a piece of the lump sum money pie …. we issued a Consumer Alert to retirees faced with the lump sum decision (see our blog here).

Since these early writings, we have consulted with several retirees to assist in making an appropriate decision based upon their unique circumstances. Moreover, we have continued to be a resource to the local and national media.

On July 18, 2012, I shared my observations with Channel 4’s Business Editor, Rod Meloni, that there are a few financial decisions in our lives we need to get right and this is one of them, quite frankly.

Earlier this month, Melissa Joy, CFP® and I were interviewed for a story by the Dow Jones News Wire (see our blog here).  The story illustrated that there are non-financial factors that should be considered in making the lump sum decision.

So, after multiple individual consultations, contributions to the media, and internal conversations with my colleagues, I share what I believe to be what really matters in making a suitable decision as it relates to continuing a monthly pension or taking a lump sum buy out:

1. Life expectancy: While not the most enjoyable topic – your life expectancy as compared to the IRS life expectancy tables [the table used is a “unisex” table] is a critical factor.  For example, a 65-year-old man or woman has a life expectancy of 84.14 years; a 70-year-old 85.25; and an 80-year-old 88.61. YOUR life expectancy is based on YOUR health, heredity and lifestyle.  Is it longer or shorter than the IRS life expectancy? If shorter, taking the lump sum is more appropriate.  If you expect it to be longer, consider continuing the monthly pension. If you know exactly when you will die, the decision is pretty straight-forward.  But, assuming you don’t know that date … there will be a degree of uncertainty in the decision.
2. Assumed rate of return if lump sum invested: Federal law governs what rate employers must use when computing the lump sum. The rate is a blended corporate bond rate that is based on age and may fluctuate month to month. The rate for a 65-year-old is near 4.25% and is lower for older ages. If your plan is to invest in vehicles that are expected to return less than the rate used to compute the lump sum, and you have an average life expectancy, then continuing the monthly pension makes more sense.  Hypothetically, five year certificate of deposit rates are currently 1% or less.  If that is your investment plan for the lump sum, it will be hard to generate more income from a lump sum so you may want to continue the monthly pension.
3. Unique circumstances: What unique circumstances do you and your family have? As I shared in the Dow Jones story, even though the number crunching may suggest one decision – the non-financial decisions might just trump the numbers. Do you have the discipline to take only monthly withdrawals equal to your previous pension if you take a lump sum?  Are you likely to give money away to others such as children when you really shouldn’t?  Do you have a gambling or substance abuse issue?  In one case, our client determined that they were likely to provide support to their kids (to their own detriment) if they had a lump sum. They therefore chose to continue the monthly pension.   

Ford and GM sure have stirred up both excitement and anxiety for many retirees.  While the GM Pension offers have come and gone, Ford salaried employees will be receiving offers and making these decisions going forward. The decision to continue a monthly pension or take a lump sum is an important one and one that you need to get correct.  To make an appropriate decision, you need to do the number crunching and consider the non-financial aspects.  Please let us know if we can help reduce some of the anxiety and assist in making a suitable decision based on your unique circumstances and goals.

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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.  You should discuss any tax or legal matters with the appropriate professional.  Prior to making an investment decision, please consult with your financial advisory about your individual situation.

Lump Sum Buyout: A Case Study

 Tim Wyman & Melissa Joy from the Center for Financial Planning were recently featured in Dow Jones NewsWires on this subject.

In an article titled Pensioners Decline Lump-Sum Buyout by Niki Reading, Tim and Melissa collectively walk through an individual client’s decision process as they choose between taking a lump sum payment offer or continuing their annuity payments.  As the excerpt reveals, it is not always a number game.  Real life issues sometimes demand real life solutions.

The client is 70 years old and his wife is in her late 60s. In addition to the pension, they have about $1 million socked away, both receive Social Security and are also employed part-time. They use an annuity and Social Security to cover monthly living expenses.

Tim Wyman, CFP® ran the numbers and determined that the buyout looked appealing: The breakeven point was at about 12 years, he says, and Mr. Wyman and his team navigated the tricky life-expectancy conversation to determine that the clients, too, felt it made good sense.

While many long-time company employees feel a sense of loyalty to their employer--and believe that nothing will interrupt their monthly pension checks--there are others who are more inclined to take the money and run. In this case, the clients were happy to cash out.

But despite the initial allure of the lump-sum payout, Mr. Wyman and Ms. Melissa Joy, CFP® had one big concern about the clients' plan. Because the firm had managed the couple's money for years, they knew that the couple had for many years offered financial support to their two adult children.

"If you have $500,000 sitting in an account, when you give kids $20,000 it doesn't seem like it'll have a huge effect," Mr. Wyman says, but over time the tab had added up for the couple. And, with a little help from Tim and Melissa, the clients recognized that a $250,000 buyout check might lead them down the same path.

The experience reinforced to Mr. Wyman that smart financial decisions don't always revolve around whether the numbers add up. Indeed, in this case the key was looking beyond the dollars and cents to see the solution was right for the clients. The answer turned out to be no.

As the Ford pension buy-out season continues, many important decisions remain for Ford retirees. Please feel free to email Melissa or Tim with additional questions or comments.

Melissa.Joy@CenterFinPlan.com   Timothy.Wyman@CenterFinPlan.com

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This case study is for illustrative purposes only. Individual cases will vary. 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. Prior to making any investment decision, you should consult with your financial advisor about your individual situation.

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.   

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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.

Want Another Reason to Consider Keeping Your GM/Ford Pension?

 Thousands of GM and Ford retirees across the nation are struggling with one of the most important decisions of their financial lives – whether to keep their current pensions or take a lump sum offer.  We support the case for each of these individuals working with their financial advisors to carefully analyze their particular situation.  But, before a final decision is made, recent statistics may give reason to pause and consider one more important factor in the puzzle. 

According to Dr. Michael Finke, professor at Texas Tech University, beginning between the ages of 55 – 59 (and certainly after age 60) we begin to lose our cognitive ability at the rate of about 2% per year.  Professor David Laibson, professor of economics at Harvard University, references research showing that between the ages of 65 and 69, 1.7% Americans are affected by dementia, and this number doubles every 5 years.  Even though financial capacity decreases, Dr.Finke indicates that confidence in financial decisions does not decrease.   So, our decisions aren’t as good as we think they are?

What does this have to do with the GM and Ford pension decision?  The potential for diminished financial capacity, combined with continued confidence in financial decision-making ability, may leave many Americans susceptible to poor future financial decision making and/or financial fraud.  By adding an annuity (a.k.a. the pension) – a monthly income stream that is locked into place – older adults may be hedging against these future dangers to their financial lives.   

If you or someone you know is still facing the GM or Ford pension decision and would benefit from an individual analysis of their situation, contact us for assistance.  And dig a little deeper into making this important decision by referencing additional blogs on this topic.

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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.

Hold the Check, Please

Many of us will never need to worry about deferring compensation. In fact, the idea of waiting to get paid for work we do now until a year or more in the future would seem ludicrous. But if you're in a position where you're being offered a Nonqualified Deferred Compensation Plan, first count yourself lucky because you're likely a high-paid executive, then take a close look at your options. 

Simply put, deferred compensation is an agreement between an employer and an employee to hold back a portion of earnings for work performed today for payment in the future. Deferred compensation plans are a benefit most commonly offered in executive pay packages. Because the planning and tax implications associated with deferred comp are complex we recommend consulting with your financial advisor before making the decision to sign on. But the following points will help give you a basic understanding.  

Key takeaways from a tax and financial planning perspective: 

• Participation will reduce current taxable income
• Earnings grow tax deferred until distribution
• Consider maxing out 401k savings first; then NQDC, since this will provide the opportunity to save more, potentially filling the gap that can arise between income needed in retirement and income received from 401 (k) plans, pensions and Social Security
• Consider flexible distribution options - either during employment or in retirement. To qualify for a tax advantage, the IRS requires a written agreement stating the specified period of deferral of income.  An election to defer income must be irrevocable and must be made prior to performing the service for which income deferral is sought (Ex: An election to participate for 2012 must be filed in December 2011).            

A big challenge when it comes to saving for retirement is creating alignment between current income needs and saving for the future. If you are eligible to participate in a Nonqualified Deferred Compensation Plan then the next step is to see how this type of retirement savings fits into your overall plan for wealth accumulation and financial independence. 

The good news is that the decision is up to you and there is a great deal of flexibility. Plus, the impact of working now and getting paid later can be invaluable.  Talk with your financial advisor to see if it makes sense for you. 

Note:  Changes in tax laws may occur at any time and could have a substantial impact upon each person’s situation.  While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors with RJFS, we are not qualified to render advice on tax matters.  You should discuss tax matters with the appropriate professional.

What Does a Social Security Raise Mean to You?

You may have heard that the Social Security Administration recently announced a 3.6% cost of living increase for Social Security recipients starting in 2012. This is good news for those receiving Social Security benefits, as the last increase came two years ago (5.8% in 2009).  If you are not yet drawing Social Security, you may be wondering what this raise means for you. 

While a PhD in Social Security benefits might be needed to calculate how, a fact that is less known is that those aged 62 or older who are not receiving benefits just yet also receive benefit of the 3.6% increase.  Essentially, Social Security benefits before age 60 are based on wage increases, but at age 62 they are based on price increases, i.e. the 3.6% cost of living adjustment. 

Other Social Security related changes courtesy of Horsesmouth.com include:

• The maximum taxable wage base rises to $110,100 in 2012, up from $106,800 in 2011.  This means that you do not pay Social Security tax on any wages over $110,100 next year.
• The earnings test before full retirement age rises to $14,640 in 2012, up from $14,160 in 2011.  If you are drawing Social Security before your full retirement age, you can earn $14,640 next year before your Social Security benefits will be reduced.
• The maximum Social Security benefit for a maximum earner retiring in 2012 will be $2,513/month, up from 2,366/month in 2011.

The bottom line is that Social Security benefits can have a meaningful impact during retirement and it is important to maximize those benefits to the extent possible.  Careful analysis based on your particular situation is therefore critical to your financial health.  Consult your financial advisor about maximizing your 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.

Taking IRA Distributions Before You Need Them?

My wife truly enjoys talking to our two dogs – not that she expects them to talk back (I don’t think so at least) – but who doesn’t enjoy seeing their heads turn as if that will really help them understand what she has to say.  I had a client give me a similar look a few years back when I suggested taking money from his IRA even though he didn’t need it for current spending.  (The client was past age 59.5 but younger than age 70.5 so he didn’t have to take a distribution quite yet.) 

While, like my dogs, he didn’t say anything his look suggested that he was thinking “why would I take a distribution that I don’t need and accelerate income taxes?”  His head started to turn straight again when I illustrated that he might want to maximize the lower tax brackets.  A married couple filing jointly can have taxable income up to $69,000 in 2011 and still remain in the 15% marginal income tax bracket (remember taxable income is adjusted gross income minus exemptions and deductions). For this client, they could take out roughly $25,000 from their IRA and still be within the 15% marginal bracket.  While no one knows what income tax rates will be for sure in the future –locking in a 15% rate seemed attractive. 

2011 IRS Tax Brackets

To find out if accelerating IRA distributions is the right move for you, work with your financial planner and tax preparer to run “what if” scenarios.

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 Timothy W. Wyman, CFP®, JD, and Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James. Please note, changes in tax laws or regulations may occur at any time and could substantially impact your situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS we are not qualified to render advice on tax or legal matters.

The Bucket Strategy

If you are in retirement (or close to retirement), you are most certainly concerned about the recent market volatility.  You are likely wondering how your investment portfolio might be structured to provide the income you need without putting the portfolio in a vulnerable position. 

 The Bucket Strategy (not to be confused with the “Bucket List”) is another way to describe a cash distribution method to provide you with income from your nest egg during any kind of market cycle. 

Consider that we each have 4 buckets and that every investment within your portfolio fits into one of these buckets.  The idea is that this strategy can provide cash flow, even if equity markets drop or stay low for extended periods of time. 

Bucket 1:  The first bucket is labeled 1-year or less.  This is the cash and short term securities that mature in less than one year to support the cash flow needs for the client for the first 12 months. 

Bucket 2:  The second bucket would start generating cash flow in the 13 month – 36^th month or years 2 and 3.  This contains short-term bonds and fixed income type securities that have a small amount of volatility and are primarily for preservation of capital.  The holdings in this bucket do pass on interest income that flows into the first bucket. 

Bucket 3:  The third bucket is structured to generate cash flow needs in years 4 and 5 and primarily contains strategic income and higher yielding bonds (lower quality, longer maturing and international type bonds).  However, they do pass on interest income that flows into the first bucket. 

Bucket 4:  The fourth bucket is made up of equities (stock investments) and other assets that have higher volatility like gold, real estate, commodities etc.  Many of these assets produce dividends to help replenish the first bucket, if the dividends are set to pay in cash vs. reinvest. 

The bucket strategy is designed to provide enough cash flow to get through roughly a 6- or 7-year period without needing to liquidate the stock portion of the portfolio.  This should provide you with the confidence and consistent income needed to enjoy your retirement and work on your bucket list! 

Talk to your financial planner to see how the bucket strategy might work for you.

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. Investments mentioned may not be suitable for all investors. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices generally rise. High-yield (below investment grade) bonds are not suitable for all investors. When appropriate, these bonds should only comprise a modest portion of your portfolio. Please note that international investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility. Gold is subject to the special risks associated with investing in precious metals, including but not limited to: price may be subject to wide fluctuation; the market is relatively limited; the sources are concentrated in countries that have the potential for instability; and the market is unregulated. Be advised that investments in real estate and in REITs have various risks, including possible lack of liquidity and devaluation based on adverse economic and regulatory changes. Commodities and currencies investing are generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising. Dividends are not guaranteed and must be authorized by the company’s board of directors. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The forgoing is not a recommendation to buy or sell any individual security or any combination of securities. Be sure to contact a qualified professional regarding your particular situation before making any investment decision.