Fixed Annuities in Retirement

Who doesn’t like a level of certainty in life?  In a world full of unknowns, it’s human nature to feel more secure by having some type of guarantee.  For some, this might mean holding a certain amount of cash in the bank or having your home paid off in retirement, but the topic I’m tackling in this blog is fixed income sources in retirement.  Traditionally this meant a pension, social security, and annuity income.  However, with pension plans now being about as common as seeing a walkman CD player and social security having its own issues, I think it makes sense to explore other options to provide a guarantee for a portion of your retirement income need.

The 50% Fixed Income Rule of Thumb

One of the many questions we discuss with clients when working with them on their financial plan (especially when they are approaching retirement) is how much of their spending goal should be comprised of fixed income sources?  Ideally, we would like to see that percentage around 50%, but every client situation is different.  So if the annual spending goal is $100,000 gross, $50,000 of fixed income sources (social security, pension or annuity income) is desirable with the remainder of income being drawn from a well-balanced, diversified portfolio.  However, depending on the client’s risk tolerance and other assets, it could make sense to have that percentage higher or lower. 

The Bygone Pension Era

Since one of the main fixed income sources for a retiree was a company pension – now virtually non-existent – it’s often up to you. The burden has been placed on the employee to fund their own retirement through a 401k, 403b or other defined contribution plan.  While company matches certainly help the employee, they don’t come close to offering the same lifetime income benefit a pension provides.  As such, it could make a lot of sense to explore the option of utilizing a fixed annuity for part of your retirement need. 

Making Room in your Plan for Annuities

Annuities don’t make sense for everyone and they have rightfully received a bad rap. Many of them are expensive and were “sold” in situations where it just didn’t make sense for the client based on their needs and their personal situation.   However, annuities are around for a reason, because they can fit the need for certain clients for a PORTION of their financial plan.  With so many different options for income, annuities typically place the burden of risk on the insurance company offering the annuity for a guaranteed stream of income.  Having a portion of your spending goal met by a fixed income source, such as an annuity, gives many clients an added layer of peace of mind, knowing that the income stream will be there regardless of what the market is doing. 

In summary, annuities can have a place in your financial plan but like anything financial, they don’t make sense for everyone.  This is our job, as your financial team member, to work with you to see if they have a place in your plan.  Don’t cringe when you hear the word “annuity” like many do. Please have an open mind because they could play a very important role in your retirement!

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Nick Defenthaler, CFP® is a CERTIFIED FINANCIAL PLANNER™ at Center for Financial Planning, Inc. Nick is a member of The Center’s financial planning department and also works closely with Center clients. In addition, Nick is a frequent contributor to the firm’s Money Centered and Center Connections blogs.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation to buy or sell any investment. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. There are special risks associated with investing in bonds (fixed income) such as interest rate risk, market risk, call risk, prepayment risk, credit risk, and reinvestment risk. Investing involves risk and investors may incur a profit or loss regardless of strategy selected. 

A fixed annuity is a long-term, tax-deferred insurance contract designed for retirement. It allows you to create a fixed stream of income through a process called annuitization and also provides a fixed rate of return based on the terms of the contract. Fixed annuities have limitations. If you decide to take your money out early, you may face fees called surrender charges. If you're not yet age 59½, you may also have to pay an additional 10% tax penalty on top of ordinary income taxes. A fixed annuity contains guarantees and protections that are subject to the issuing insurance company's ability to pay for them.

Smart Moves to Make the Year You Retire

So you’ve decided to hang ‘em up? Congratulations!  Retirement is an extremely personal decision and is made for a multitude of reasons.  Many of our clients have had the ability to retire for several years, however, they have now reached a point where the weekly grind isn’t as enjoyable as it once was.  There are probably thousands of things running through your head.  What will life look like without work?  How will I spend my days?  Where do I/we want to travel?  Do I want to work part-time or volunteer?  With so many emotions and thoughts, it can be easy to miss good opportunities to really maximize your final year of full-time work. How do you get the most “bang for your buck” in your final year of working full-time?

Maximizing your employer retirement contribution (401k, 403b, etc.)

If you aren’t doing so already, do your best to maximize your company retirement plan contribution.  If you are retiring mid-year, adjust your payroll deduction to make sure you are contributing the maximum ($24,000 for those over the age of 50 in 2015) by the time you retire.  If monthly cash flow won’t allow for it, consider using money in a checking/savings or taxable account to supplement your cash flow so you can put the max into the plan.  This will most likely be the final year you will be in the highest tax bracket of your life, you really want to take advantage of this and get the maximum tax benefit. 

“Front-load” your charitable contributions

If you are charitably inclined and plan on making charitable gifts, even into retirement, you might consider “front-loading” your donations.  Think of it this way – if you are currently in the 25% tax bracket and you will drop into the 15% bracket when retired, donating in which year will give you the most tax savings by making a donation?  The year you are in the higher bracket, of course!  So if you donate $5,000/year to charity, consider making a contribution for $25,000 while you are in the 25% bracket (ideally with appreciated securities).  This would satisfy five years worth of donations and save you more on your taxes.  As I always tell clients: When you save more money on your tax bill by gifting efficiently, you give less to the IRS’ and more to the organizations you care about!

Explore your health care options

This is typically a retiree’s largest expense.  How will you and your family go about obtaining medical coverage upon retirement?  Will you continue to receive benefits on your employer plan?  Will you go on COBRA?  Will you be age 65 soon and enroll in Medicare?  Are you retiring young and need to obtain an individual plan until Medicare kicks in?  No matter what your game plan, make sure you talk to the experts and have a firm grip on the cost and steps you need to take to ensure you don’t go without coverage and that it’s as affordable as possible.  With recent changes in health care, we are positioning more and more clients in a way to qualify for health care premium subsidies under the Affordable Care Act (“Obamacare”). For more information on how you might qualify, take a look at Matt Trujillo’s recent blog on this topic.

With so many moving parts, it really makes sense to have someone in your corner to help you navigate through these difficult and sometimes confusing retirement topics and decisions.  Ideally, seek out the help of a Certified Financial Planner (CFP®) to give you the comprehensive guidance you need and deserve!

Nick Defenthaler, CFP® is a CERTIFIED FINANCIAL PLANNER™ at Center for Financial Planning, Inc. Nick is a member of The Center’s financial planning department and also works closely with Center clients. In addition, Nick is a frequent contributor to the firm’s Money Centered and Center Connections blogs.

Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of RJFS or Raymond James. 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. 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. You should discuss tax or legal matters with the appropriate professional. C14-041996

Reconsidering Reverse Mortgages

I always thought of reverse mortgages as a last resort for retirees who had spent down their retirement savings and needed more income in retirement.  The reason why I felt this way, and perhaps why a lot of people had learned to dislike these products, was because of the high fees and interest embedded in the product.  However, with recent changes to various mortgage programs, it may be worth taking a closer look.

Last resort or income stream?

Let’s begin by first looking at how these products used to work and why they typically weren’t advisable except as a last resort.  For a lot of retirees, one of their largest assets is the equity in their houses.  Unfortunately, other than providing shelter, a house doesn’t have a lot of financial benefit.  You might still carry a mortgage in retirement; you pay property taxes, home owners insurance, utility bills, and the occasional home repair.  All of these are money out of your pocket, but when is the last time your house paid you?  Enter the reverse mortgage….a potential way to create an income stream (or lump sum) which can turn the house into a more meaningful asset rather than a money pit.  Everything sound good so far?  Not so fast! The problem is that, in the case of a married couple, the bank used to come knocking at the first death and demand repayment of the income stream plus interest that had been accruing the whole time.  Can’t afford to pay that back all at once? No problem…the bank will just sell the house from under you, take their money back, and give the survivor the remainder (if any) so they can go and try to find a new place to live.  All of a sudden this program doesn’t sound so good.

Reverse mortgages get a make-over

This idea of the survivor losing their house was the primary reason why I rarely recommended clients consider these products in a serious manner. However, in 2013 there were major revisions to how a lot of these products were structured. The fees still seem to be fairly high, but no longer is the bank able to sell the property out from under the survivor.  Now the repayment of the loan isn’t due until both people have died.  With these new changes, it may be worth taking a look at tapping into your home’s equity, knowing that you and your spouse won’t have to leave your house unless you want to.  Work with your financial professional to understand more fully if this type of product might make sense for your specific situation.

Matthew Trujillo, CFP®, is a Certified Financial Planner™ at Center for Financial Planning, Inc. Matt currently assists Center planners and clients, and is a contributor to Money Centered.

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. This is not a solicitation or recommendation for a reverse mortgage strategy. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of RJFS or Raymond James. There are significant costs associated with Reverse Mortgages, such as: up-front mortgage premium, annual premium, origination fee, closing costs, monthly services charge, and appraisal fees. There are significant risk associated with Reverse Mortgages. Generally, the homeowner is still obligated to pay taxes, insurance, and maintenance and if the borrower moves, the loan becomes due, and the total amount due may be larger than anticipated or planned for. Medicaid may also be affected. C14-040266

Capital Gains: 3 Ways to Avoid Buying a Tax Bill

Many asset management firms have started to publish estimates for what their respective mutual funds may distribute to shareholders in short- and long-term capital gains. Moreover, early indication is that some firms will be paying out capital gains higher than recent years. As you may be aware, when a manager sells some of their holdings internally and realizes a gain they are required to pass this gain on to its shareholders. More specifically, by law and design, asset management firms are required to pay out 95% of their realized dividends and capital gains to shareholders on an annual basis. Many of these distributions will occur during November and December. Remember this is only relevant for taxable accounts; capital gain distributions are irrelevant in IRA’s or 401k’s.

Capital gain distributions are a double edged sword.  The fact that a capital gain needs to be paid out means money has been made on the positions the manager has sold. The bad news – the taxman wants to be paid.

What can we do to minimize the effect of capital gain distributions:

1. We exercise care when buying funds at the end of the year to avoid paying tax on gains you didn’t earn, and in some cases hold off on making purchases.

2. We may sell a current investment before its ex-dividend date and purchase a replacement after the ex-dividend date.

3. Throughout the year we harvest tax losses, when available, to offset these end of the year gains. 

As always, there is a balance to be struck between income tax and prudent investment management.  Please feel free to contact us if you would like to discuss your personal situation.

This material is being provided for information purposes only and is not a complete description of all available data necessary for making an investment decision, nor is it a recommendation to buy or sell any investment. Every investor’s situation is unique and you should consider your investment goals, risk tolerance, tax situation and time horizon before making any investment decision. Any opinions are those of [insert FA name] and not necessarily those of Raymond James. For any specific tax matters, consult a tax professional. C14-040561

An Easy Guide to Year-End Tax Planning

With the end of the year fast approaching, tax planning is top of mind for many clients.  At The Center, we are proactive throughout the entire year when it comes to evaluating a client’s current and projected tax situation, but now is typically the time most people really start thinking about it.  We like to share this simple checklistthat we feel is very user friendly and a good guide to evaluating your tax situation for the year.  Let’s be honest, does anyone feel like they don’t pay ENOUGH tax?  Most clients want to lower their tax bill and be as efficient with their dollars as possible. 

Questions to Consider

Here are some questions we ask clients that could ultimately help save money at tax time:

• Are you currently maximizing your company retirement account (401k, 403b, Simple IRA, SEP-IRA, etc.)?

  • These plans allow for the largest contributions and are deductible against income

    • In our eyes, this is often the most favorable way to reduce taxes because it also goes towards funding your retirement goals! 

    • How are you making charitable donations?  Are you writing checks or gifting appreciated securities?

      • Gifting appreciated securities to charity allows you to avoid paying capital gains but still receive a charitable deduction – a pretty good deal if you ask me!

        • Donor Advised Funds are a great way to facilitate this transfer and are becoming increasingly popular lately because of the ease of use and flexibility they provide for those who are charitably inclined – take a look at Matt Trujillo’s recent blog on this great tool.

        • Should I be contributing to an IRA?  If so, should I put money in a Traditional or Roth?

          • These are fantastic tools to help fund medical and dependent care costs in a tax-efficient manner

            • HSAs can only be used, however, if you are covered under a high-deductible health plan and FSAs are “use it or lose it” plans, meaning money contributed into the account is lost if it’s not used throughout the year – take a look at the blog I wrote earlier this year that goes into greater detail on the advantages and disadvantages of HSAs and FSAs

This is a busy time of year for everyone.  Between holiday shopping, traveling, spending time with family, and completing year-end tasks at work, taxes can get lost in the shuffle.  We encourage you to check out the link we’ve provided that will hopefully give you some guidance with your personal tax situation.  Although we are not CPAs, tax planning is something we feel is extremely important.  We would love to hear from you if you have any questions or ideas you’d like to discuss with us!

Nick Defenthaler, CFP® is a Certified Financial Planner™ at Center for Financial Planning, Inc. Nick currently assists Center planners and clients, and is a contributor to Money Centered and Center Connections.

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 Raymond James financial advisors, we are not qualified to render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional. C14-037860

Establishing Clear Direction for your Retirement Plan

Retirement planning is an exercise in imagining your future.  We all posses the ability to think ahead and plan for the future; whether it is making plans for tomorrow, arrangements for a trip next year or planning ahead for retirement in 5 years, 10 years or even longer. Thinking ahead allows us to carefully arrange our financial lives to align with our future vision.

Be Ready to Adjust Your Plan

Like life, adjustments will be necessary along the way.   It is more common than you may think for couples to approach retirement with an agreed upon plan, only to have divergent thoughts surface before reaching the goal.  Financial planning and thoughtful conversation can help to reestablish clear direction and a workable plan to follow together. Here is a simplified case study to help illustrate crucial planning steps leading to retirement.

Try 3 Action Steps to Jumpstart Your Plan

When Jack and Sally began to think about retirement, they had more questions than answers.  Sally was looking forward to relaxing and spending time in a warmer climate, while Jack couldn’t imagine moving to another state away from his volunteer work and grandchildren.  This is not a unique situation.  With a goal of retirement in 5 years, we established these three action steps:

• First they needed to review assets, future income sources and anticipated expenses to determine how much money they will need to live their retirement plan.  Increased longevity is factored into the financial analysis.

• They were in agreement to be debt free and have enough assets and income sources that cash flow would not be a limiting factor in retirement.  That gave them a clear picture of how much they needed to save and invest leading up to retirement.

• Jack and Sally agreed they would downsize their home to accommodate the goal of renting in a warmer climate for 5 months during the coldest part of Michigan winters.

Test your pre-retirement plan by laying out your unique objectives to see if you have a clear direction and workable plan to follow together.  The most successful transitions hold the promise of retiring to something, not away from something.  Contact me if you need help getting started or making adjustments along the way to your retirement goals.

Laurie Renchik, CFP®, MBA is a Partner and 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.

Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of Raymond James. C14-034237

A ROTH IRA Strategy for High Income Earners

Do you have a 401k Plan from your current employer?  Does it allow you to make after tax contributions (these are different than pretax contributions and Roth 401k contributions)?  If the answer to both is “yes”, a recent IRS notice may present a welcome opportunity.  IRS Notice 2014-54 has provided guidance (positive guidance) allowing the splitting of after tax 401k contributions to a ROTH IRA. Although I believe that ROTH IRAs are used in many less than ideal situations, this is one strategy that can make sense for higher income earners; tax diversification and getting money into a ROTH without a big upfront tax cost. 

After answering “yes” to the first two questions, the next question is, “Are you making maximum contributions on a pretax basis?”  That is, if you are under 50 years old, are you contributing $17,500 and if you are over 50 (the new 30) $23,000? If you are making the maximum contribution, then a second look at after tax contributions should be considered.  Whew – that’s three hoops to jump through – but the benefits might just be worth it.

Putting Notice 2014-54 to Work

For example, Teddy, age 50 has a 401k plan and contributes $23,000 (includes the catch up contribution) and his employer matches $5,000 for a total of $28,000.  Teddy’s plan also allows for after tax contributions and he may contribute $29,000 more up to an IRS limit of $57,000. 

The new IRS Notice makes it clear and simplifies the process allowing this after tax amount at retirement to be rolled into a ROTH IRA.

The bottom line:  It is more attractive to make after tax contributions to your 401k with the flexibility of converting the basis to a ROTH at retirement or separation of employment without the tax hit of an ordinary Roth conversion.

As usual, the nuances are plentiful and your specific circumstances will determine whether this strategy is best for you.  To that end, we are here to help evaluate the opportunity with you.

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.

This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of Raymond James.

The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. C14-033701

Retirement Spending: Is My Savings Goal Too High?

 Determining how much you actually spend each month is really the first step in dialing in on how much money you need or want in retirement. (If you missed it, check out my last blog on this!) With so many payroll deductions (taxes, 401k savings, medical premiums, insurance, etc.) it can be pretty staggering when you crunch the numbers and see what you’re truly spending each month. It’s probably much less than you thought!  The good news is that several of these payroll deductions will disappear or be significantly reduced when you retire.  Let’s dive in and take a look at some of those items to shed some light on what might be your “number” for desired retirement spending.

The Good News on Taxes

There’s a good chance your tax liability will be lower in retirement.  Two items that go away upon retirement are Social Security and Medicare tax (FICA).  As an employee, you are responsible for kicking in 6.2% to Social Security and 1.45% to Medicare – a total of 7.65%. Think about it, that’s $7,650/yr if you earn $100,000 annually.  Kiss those taxes goodbye on your last day of work. 

When you begin to receive your Social Security benefit, the benefit may or may not be taxable, depending on your adjusted gross income (AGI).  However, most clients see at least some taxation of benefits. Per SSA.gov, the maximum amount of your benefit that can be subject to federal tax is 85%. Meaning if you were receiving $35,000/yr in benefits, the maximum taxable amount that would be included in your AGI would be $29,750 ($35,000 x 85%).  In addition, most states, including Michigan, do not tax Social Security benefits.

Pension , IRA, qualified retirement plan (401k, 403b, etc.) distributions will be included in your income for the year on the federal level – these income sources are treated as ordinary income.  This is why being cognizant of your current and future tax bracket is so important in proactive tax planning.  A few years ago, Michigan began taxing these income sources on the state level, but the amount that is included in taxable income for the year is dependent on your age and total benefits.

Forget Saving for Retirement

One of the many benefits of being retired is that you no longer have to save for retirement!  The maximum 401k contribution for someone over the age of 50 in 2014 is $23,000. We commonly see clients saving the maximum while in the latter half of their working years.  For a couple who both maximize their retirement plans at work, we are talking about a $46,000/yr outflow that will no longer exist upon retirement.    

Getting Rid of Debt

The goal of many is to be debt free (or close to it) upon retirement.  If your mortgage (not including taxes and insurance – unfortunately those items never go away) is $1,500/mo, this is $18,000/yr in savings … a huge amount if you are able to eliminate your house payment prior to retirement.  With rates as low as they have been, it often makes sense to keep the mortgage because it’s “cheap money”.  However, being debt free in retirement is a very personal decision and is typically more of a “what makes you sleep better at night” decision rather than a strictly “numbers” decision.

Adding it All Up

When you factor in what you are saving for retirement, taxes, and having a mortgage, many clients are shocked to realize that those items can eat up close to 50% of total gross income.  So, if a client has joint income of $200,000 we may propose $100,000 in retirement spending (when we do, they often look at us like we’re crazy).  But if we back out their total 401k savings of $46,000, Social Security and Medicare tax of $15,300 ($200,000 x 7.65%), their $1,500/mo or $18,000/yr mortgage and a total tax reduction of approximately $10,000 because less total dollars are being generated, that is a total of almost $90,000 that will no longer exist in retirement.  So what does that mean?  It means the couple can live the equivalent of their current $200,000 lifestyle on $110,000 in retirement – pretty close to the suggestion of $100,000 in retirement spending! 

For this reason, I cringe when I hear advice like, “You need $2,000,000 to have a fighting chance at retiring,” or, “You will spend 70% of your current income in retirement.”  Everyone’s situation is different and many folks are probably living on a heck of a lot less than they actually think.  If you’re retiring in the next 10 years, I urge you to walk through this process. Really start thinking about what you want to spend when that time comes.  It will help you plan accordingly and will hopefully significantly improve the chances of you reaching your retirement goals.

Nick Defenthaler, CFP® is a Certified Financial Planner™ at Center for Financial Planning, Inc. Nick currently assists Center planners and clients, and is a contributor to Money Centered and Center Connections.

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Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of RJFS or Raymond James. Any example is hypothetical in nature and is used for illustrative purposes only. Individual cases will vary. Every investor’s situation is unique. Please consult with your financial advisor about your individual situation. Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person’s situation. Investors should consult a tax advisor about any possible state tax implications. C14-026884

Retirement Spending: Finding Your Actual Cost of Living

 When you’re approaching retirement, it can be hard to determine how much you would like to spend when you stop working.  It’s a scary thought for most.  You wonder: Have I saved enough?  Is what I want to spend reasonable and safe?  It can seem a bit overwhelming, but hopefully part one of this two-part blog series will help to simplify that discussion. 

How much does my lifestyle really cost?

Start the conversation by figuring out your current cost of living. To illustrate, look at an example of how this figure might be much less than you think.  Tom and Mary are both age 58 and plan to retire at age 62.  The discussion of retirement planning is becoming increasingly important to them as they near retirement.  Tom works for Ford and earns $100,000/yr and Mary works as a teacher earning $55,000/yr.  Tom and Mary are great savers and each contribute the maximum to their 401k each year ($23,000 each, $46,000 total for 2014).  They have health insurance through Mary’s work and pay $400/mo for excellent coverage – they also save $200/mo towards a Health Savings Account (HSA) to be efficient with their out-of-pocket medical expenses each year.  They each pay into a group disability policy that costs $100/mo in total.  Of course, we can’t forget about taxes.  In 2013, they paid $12,000 in federal tax and $4,000 in Michigan state tax. Social Security and Medicare (FICA) cost them $11,858 (7.65% on their income).  Below is a breakdown of these payroll deductions on an annual basis:

Assuming no additional dollars are saved beyond the 401k, Tom and Mary are actually living on $72,742/yr ($155,000 – $82,258) – only 47% of what they are earning.  This is a great starting point but this is where we start to explore a bit by asking questions like: 

• Are they happy with their current lifestyle? 
• Do they feel constrained right now and want to spend more on things like travel in retirement?
• Or, do they already travel and do the things they love on their $72,742/yr lifestyle? 
• What personally meaningful things do they want to accomplish once they are retired? 

These kinds of questions open the discussion surrounding retirement spending and goals.  It is also worth mentioning that there will be several expenses and payroll deductions that will ultimately disappear or significantly reduce upon retirement.  I will go into detail on these items and show how things change in retirement in part two of this blog series – stay tuned!

Nick Defenthaler, CFP® is a Certified Financial Planner™ at Center for Financial Planning, Inc. Nick currently assists Center planners and clients, and is a contributor to Money Centered and Center Connections.

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Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of RJFS or Raymond James. Any example is hypothetical in nature and is used for illustrative purposes only. Individual cases will vary. C14-026770

Richard Marston on Investing for a Lifetime

 What does a financial planning geek do for fun? He visits the Wharton School of the University of Pennsylvania for a day of lectures! The first part of the day was spent hearing from Professor Richard C. Marston. Professor Marston is the James R.F. Guy Professor at Wharton, a graduate of Yale, MIT, and Oxford (on the east coast they would call him “wicked smart”). Moreover, he has taught asset allocation for over twenty years and in 2011 wrote the book Portfolio Design: A Modern Approach to Asset Allocation (Wiley, 2011). Needless to say, it was a thought-provoking and worthwhile day.

In two lectures -- the first taken from his new book, Investing for a Lifetime” Managing Wealth for the “New Normal” and the second titled “Investing with a Fifteen Year Perspective: Past and Future” – Marston shared what he believes to be some “best practices” in savings and investing. He talked about choosing an asset allocation focusing on stocks when you are still years from retirement. You then gradually shift towards a 50/50 portfolio while saving 15%-20% of income during the accumulation period. And once you reach retirement, he discussed spending 4% of accumulated wealth. My sense is that these are consistent messages that our clients have heard from us over the years. 

During one of the wicked smart professor’s lectures, he shared that as he gets older, he has a greater appreciation for the role that investor and advisor behavior plays in ultimate investment success.  For example, he believes in using active managers. He also believes that selecting the right investments is important (and he is paid by several family offices to do so), but behavior such as letting fear or greed control actions plays a critical role as well.

Professor Marston’s recent work also focuses on determining a savings goal for retirement. A common rule of thumb is that investors must save 8 times their income before they retire.  So, if you earn $100k, then you need $800k saved at retirement.  Professor Marston was intrigued by the simplicity of the general rule and decided to put it through his own analysis. In the end, his analysis suggested that 8 times income is probably too low for most people.  His own conclusions, obviously depending on the exact assumptions, ranged from 11.5 to 18.4 times income. In his opinion, your savings goals will vary widely depending on two main factors:

• If you are single: Your savings must be higher because a couple will receive more in social security benefits at the same earnings (consider it a marriage premium).
• If you earn much more than $100k: Your savings rate needs to be higher because social security plays a lessor role in your retirement income.

As a quick aside, I was pleased to hear Professor Marston include and emphasize the importance of social security in the retirement planning analysis.  Without it, the savings rates above would need to be increased significantly.  I invite you to read our many previous posts on social security and let us know if we can help answer any questions.

On the flight home from the lectures, I read Professor Marston’s newest book Investing for a Lifetime (Wiley, 2014). It’s about making saving and investing understandable to the investor.  Probably the most important statement, that occurs early and often, is SAVING IS MORE DIFFICULT THAN INVESTING. Meeting your life goals, such as retirement, is much more dependent on our savings than getting another 1% from investment portfolios.  As I have written in the past, saving is much more than dollars and cents; it takes discipline and perseverance.

For our long-time clients, the book would provide a good refresher on many of the concepts we have discussed and encouraged over the years.  If you have a family member or friend starting their career or looking to take more control of their finances, Professor Marston has the ability to make the complex simple and I think his books would be a wonderful gift.

The second part of my Wharton School visit was spent hearing from Professor Christopher Geczy, Ph.D., another wicked smart guy.  I will leave that review for another post.  If you like Alpha, Beta, Correlation coefficient, Standard Deviation, R Squared, Systematic risk, and Idiosyncratic risk…well you are in for a treat!

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.

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