Retirement Income Planning

, ,

2013/2014: Key Financial Planning Numbers

, ,

 As we approach year-end (yes, already!), it is time to determine what needs to be done to reach your 2013 financial goals AND start preparing for 2014.  The 2014 Contribution and Annual Gifting Limits were recently released, and they remain unchanged from 2013 limits.  Here is summary of the existing limits for your reference.

If you haven’t completed your retirement plan contributions or gifting for 2013, find time to connect with your financial planner to make sure you meet the appropriate deadlines.  And make plans now to coordinate with your planner to set your 2014 goals!

Sandra Adams, CFP® is a Financial Planner at Center for Financial Planning, Inc. Sandy specializes in Elder Care Financial Planning and is a frequent speaker on related topics. In 2012 and 2013, Sandy was named to the Five Star Wealth Managers list in Detroit Hour magazine. In addition to her frequent contributions to Money Centered, she is regularly quoted in national media publications such as The Wall Street Journal, Research Magazine and Journal of Financial Planning.

Five Star Award is based on advisor being credentialed as an investment advisory representative (IAR), a FINRA registered representative, a CPA or a licensed attorney, including education and professional designations, actively employed in the industry for five years, favorable regulatory and complaint history review, fulfillment of firm review based on internal firm standards, accepting new clients, one- and five-year client retention rates, non-institutional discretionary and/or non-discretionary client assets administered, number of client households served.

, ,

The Ideal Age to Start Social Security

, ,

 I recently had an opportunity to travel to Chicago to meet with a group of retired airline pilots.  We had a great conversation on areas such as estate planning, investment planning and income tax planning given changes that occurred in January 2013.  However, it was Social Security that garnered the most interest and questions for this group of retirees between the ages of 60 and 70.  Specifically, the question at hand was, “When is the ideal time to start receiving social security retirement benefits?” 

If you think that the IRS Code is complex, then Social Security claiming rules are a close second.  Unfortunately there is a lot of confusion and misinformation.  Moreover, the stakes are quite high.  Perhaps at age 40 social security benefits are a distant thought, but for those aged 60+ the issue is quite ripe. 

Deciding When to Claim

As with most financial planning decisions, general rules get you only so far.  The key is to structure your decision, when to claim in this case, based on your individual goals and circumstances. The reason that most Americans choose to start social security retirement benefits as early as possible is because frankly they need the money now.  However, for those with flexibility in timing, there are strategies that can be employed to maximize benefits, especially for married couples. 

Social Security Simple Math

All kidding aside, if you know the day you will die then the decision is straightforward and is a “simple” math equation.  Barring certainty on that “day” however, certain assumptions must be made.  You see, social security benefits are designed to be actuarially fair or equal. Meaning, if you collect a reduced benefit starting early at age 62 you will have smaller payments lasting for a longer period of time, but if you elect to postpone receiving benefits you will collect a larger amount for a shorter period of time. If you live to normal life expectancy the math is the same.

There are a variety of software programs designed to assist in making the most-educated decision about the optimal time to claim social security retirement benefits.  Please feel free to contact us if you would like assistance in making this important decision.

Timothy Wyman, CFP®, JD is the Managing Partner and Financial Planner at Center for Financial Planning, Inc. and is a frequent contributor to national media including appearances on Good Morning America Weekend Edition and WDIV Channel 4 News and published articles including Forbes and The Wall Street Journal. A leader in his profession, Tim served on the National Board of Directors for the 28,000 member Financial Planning Association™ (FPA®), trained and mentored hundreds of CFP® practitioners and is a frequent speaker to organizations and businesses on various financial planning topics.

The information contained in this report does not purport to be a complete description of the subjects referred to in this material.  Any information is not a complete summary or statement of all available data necessary for making a 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.

Social Security Planning for Divorcees

 Today’s longer life expectancies, especially for women have increased the importance and complexity of retirement income planning.  What used to be a 20-year retirement period has progressed to 30+ years for many baby boomers.  One common concern I hear expressed from women thinking about leaving the workforce and transitioning into retirement is "can I enjoy my desired lifestyle and have enough money to last through my retirement years."  Discussing retirement income and what part Social Security will play often leads to this question, “If I continue working, can I draw on my ex-husband's earning record at my full retirement age and defer my own Social Security benefit until age 70?"

The answer is “yes” and “it depends!”  In a special rule that applies only to divorced spouses, you can claim benefits on your ex even if he has not yet filed for retirement benefits.  The key is he must be at least 62 years old with sufficient Social Security credits.

Here is how this strategy works:

  • At your Full Retirement Age (FRA) file a restricted claim for spousal benefits only
  • You begin to collect 50% of your ex-husbands FRA benefit from age 66 to 70
  • The Social Security benefit based on your earnings record increases by 8% per year with the delayed benefit credit from age 66 to age 70

Additional requirements:

  • You are single and were married for more than 10 years
  • You have been divorced more than 2 years (If divorced less than 2 and your ex-spouse is not collecting you must wait for the 2 year mark to receive benefit) 

Crunching the numbers:

  • If you are less than FRA, drawing an ex-spouse benefit to delay yours may not be allowed because the decision is impacted by the amount of your own benefit.  If your benefit is greater (prior to reaching FRA) than ex-spouse you must take your own benefit.
  • This strategy makes sense if your retirement benefit at full retirement age, plus a 32% increase due to delayed retirement credits would be worth more than the spousal benefit.

Settling on a Social Security strategy is one piece of the retirement income puzzle.  This strategy is not meant to be a one size fits all solution; rather an example of how Social Security planning can be customized to meet your individual income needs.

Laurie Renchik, CFP®, MBA is a Senior Financial Planner at Center for Financial Planning, Inc. In addition to working with women who are in the midst of a transition (career change, receiving an inheritance, losing a life partner, divorce or remarriage), Laurie works with clients who are planning for retirement. Laurie was named to the 2013 Five Star Wealth Managers list in Detroit Hour magazine, is a member of the Leadership Oakland Alumni Association and in addition to her frequent contributions to Money Centered, she manages and is a frequent contributor to Center Connections at The Center.

Five Star Award is based on advisor being credentialed as an investment advisory representative (IAR), a FINRA registered representative, a CPA or a licensed attorney, including education and professional designations, actively employed in the industry for five years, favorable regulatory and complaint history review, fulfillment of firm review based on internal firm standards, accepting new clients, one- and five-year client retention rates, non-institutional discretionary and/or non-discretionary client assets administered, number of client households served.

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.  You should discuss any tax or legal matters with the appropriate professional.

, ,

Ladies – Don’t be left out of the Retirement Income Discussion

, ,

 We know that statistically women outlive men.  By age 85, there are approximately five women alive for every three men.  By age 95, the ratio of women to men doubles.  (Source: 2010 U.S. Census Bureau).  We also know that income disparities over time can have significant implications on the amount women are able to save for retirement.  Ultimately this means women need to fund a longer retirement with fewer financial resources.  

To help frame the retirement income decisions women have to make when approaching retirement, use the following suggestions as general guidelines:

  • Establishing a target age is important because when you retire will affect how much you need to save.  For example, if you retire early at age 55 the number of years you have to save is lessened and the number of years that you will be living off retirement savings is longer.
  • Medicare generally doesn’t start until you reach age 65.  Retiring prior to eligibility for Medicare means you may have to look into COBRA or a private individual policy, which can be expensive.
  • You can begin receiving your Social Security benefit as early as age 62.  However, your benefit is then reduced 25% to 30% if you do not waiting to collect until full retirement age.
  • Working part time during retirement will allow you to rely less on retirement savings in the beginning and you may also have access to affordable health care while waiting for Medicare.
  • If you are married, and your spouse is still working too, it may pay to think about staggering retirements to ease the financial transition into retirement.

Creating a retirement income roadmap is a practical suggestion for managing and overcoming the unique challenges women face in retirement.  Don't sit this one out.  Join the discussion and learn along the way if necessary.  A financial professional can help sort through the options to develop a plan that is right for you.   One of my favorite quotes by Henry David Thoreau provides a timeless message for looking to the future; "Go confidently in the direction of your dreams. Live the life you have imagined."

Laurie Renchik, CFP® is a Senior Financial Planner at Center for Financial Planning, Inc. In addition to working with women who are in the midst of a transition (career change, receiving an inheritance, losing a life partner, divorce or remarriage), Laurie works with clients who are planning for retirement. Laurie was named to the 2013 Five Star Wealth Managers list in Detroit Hour magazine, is a member of the Leadership Oakland Alumni Association and in addition to her frequent contributions to Money Centered, she manages and is a frequent contributor to Center Connections at The Center.

Five Star Award is based on advisor being credentialed as an investment advisory representative (IAR), a FINRA registered representative, a CPA or a licensed attorney, including education and professional designations, actively employed in the industry for five years, favorable regulatory and complaint history review, fulfillment of firm review based on internal firm standards, accepting new clients, one- and five-year client retention rates, non-institutional discretionary and/or non-discretionary client assets administered, number of client households served.

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.

,

File & Suspend: The Best Kept Social Security Secret?

,

 The other day, one of our associates was on the phone with the Social Security Administration (SSA). When asked about the “File & Suspend” strategy, the SSA staffer said he hadn’t heard about it “yet”. Not exactly encouraging since “File & Suspend” has been around since about 2000. More than a decade later, this highly effective social security retirement benefit strategy is still considered new and obviously causing confusion.

To recap, this strategy is designed to help a married couple maximize their combined social security retirement benefits.  One of the spouses, the higher earner, will “file & suspend” at full retirement age which allows the lower earner (or one with no earnings record) to begin receiving spousal benefits.  Additionally, the higher wage earner will receive delayed retirement credits from full retirement age until the age of 70, which can have a significant impact in maximizing the couple’s combined benefits. (See Julie Hall’s October 31, 2012 blog post One Social Security Strategy Too Many Married Couples Miss).

Once a couple decides to implement this strategy

It's time to deal with the Social Security Administration. 

We have not had a client file and suspend using the SSA’s online process.  While this may be possible, because of the importance on getting this correct and the apparent confusion involved, we suggest visiting the SSA in person if possible.  Obviously this requires more of a time commitment on your behalf, but may ensure that the application gets processed correctly. Additionally, both couples can attend together to take care of both their applications. A client recently shared their experience and stated that they were glad that they went in person. The visit took an hour and a half with their cooperative SSA staffer (even though this was the staffers first time completing a “file & suspend” request). 

What needs to be communicated to the Social Security Administration at your meeting? 

It is important to note that there is nothing on the application that asks if you want to suspend your benefits to earn delayed retirement credits, thus the general confusion even for SSA staffers. It is important to put a statement in the “remarks” section of the application stating, "I want to voluntary suspend all benefits in order to earn delayed retirement credits”. This is critical because voluntary suspension can only be requested if benefits have not yet been paid for the month. 

What might the conversation actually sound like?  Let’s use Bob and Mary Smith as an example: 

Bob: “I have reached full retirement age.  I would like to file for social security and suspend my benefits immediately so that I do not receive any payments and earn delayed retirement credits.”

Mary: “Once my husband Bob files and suspends his benefits, I would like to file for my spousal benefits, please,” (while using “please” may or may not help, I trust you agree that is a good thing). 

Last, but certainly not least, ask to get a photocopy of the application for your own records. 

Please use us a resource for all of your social security retirement needs.  Social security retirement benefits can play an important role in your overall retirement success and we’d enjoy helping you maximize your benefits.

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, is not a complete summary or statement of all available data necessary for making an investment decision, and does not constitute a recommendation.  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.  The strategy mentioned may not be suitable for all investors.  Please consult the appropriate professional regarding your individual situation.

,

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.

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

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.   

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.

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.

Live YOUR Plan™