Guidant Response: Knowing When to Retire

There was an interesting article on The Bleacher Report on Ray Lewis (@raylewis52com) of the Baltimore Ravens.  The report raised a question whether Ray should retire or not.  The focus of the article was based solely on Ray Lewis’ football abilities and his impact on the game.  I’m not here to debate the “football” aspects of retirement but rather the financial.

I speak to potential retirees on a daily basis and after twenty years of experience I can say almost without exception the overriding question these folks ask is whether they’ve accumulated enough assets to sustain their desired lifestyle until mortality.  Of course the finances of a professional athlete is substantially different than the average American who in all likely worked over 30 years and has a substantially more modest lifestyle. Athletes have a short professional career where they earn a substantial amount of income in a short period of time.  Unfortunately, many spend as if that level of income will continue well past their careers.  Luckily for Ray he’s had a long productive career playing middle-linebacker and can in all likelihood continue to have a huge impact on the game.  Nonetheless, should he retire?

From a clinical financial perspective it will depend if he’s at financial independence.  I define that as the date of having enough savings and investments augmented by inflows (income from working, businesses, rentals, pension, etc) to sustain his family’s finances until mortality.  This is an exercise that not enough people do and I would venture to say even fewer professional athletes actually spend time and effort evaluating.  In short review your finances; create a financial inventory (balance sheet), next examine your outflows and inflows (expenses to income), in other words determine where is income coming from and how long do you reasonable expect for it to continue and more importantly where does your hard earned money go?  Next, examine your investment personality; do you have an appetite for risk?  What do you expect in results?

These questions and many more need to be discussed before you deploy your money.  Once that’s complete, sufficient time should be spent examining your overriding objectives, such as your vision, values and goals.  Aside from having enough income for life, what else is important to you?  These are the issues and building blocks of a retirement strategy/plan that can carry you through retirement.

So what about Ray Lewis?  In my opinion it depends on his health, passion for the game and current finances.  He signed a seven-year contract in 2009 and in professional sports where careers are extremely short; Ray has the opportunity to be under contract for another 4 years.  While it’s unlikely for him to play that position at age 40, another season or two is certainly conceivable. One of the best things he can do is create a strategy after analyzing his current situation as discussed above, which undoubtedly will shed light on that question.

*PLEASE NOTE: The information above being provided is strictly as a courtesy. When you link to any of the sites provided here, you are leaving this site. We make no representation as to the completeness or accuracy of information provided at these web sites. Nor is the company liable for any direct or indirect technical or system issues or any consequences arising out of your access to or your use of third-party technologies, web sites, information and programs made available through this web site. When you access one of these web sites, you are leaving our web site and assume total responsibility and risk for your use of the web sites you are linking to. Registered Representatives Offering securities Offered Through First Allied Securities, Inc. Registered Broker-Dealer Member FINRA, SIPC. Allen Yee, CEA, RFC, CA Insurance License #0747874

Resources: Bleacher Report: Ray Lewis: Should the Original Raven Consider Retirement? (http://bleacherreport.com/articles/989059-ray-lewis-should-the-original-raven-consider-retirement)

Guidant Response: Financial Resolutions for 2012

News Brief Provided By: Allen G. Yee

An absolute must read for everyone heading into 2012. Planning and saving/investing are top priorities but right up there should be investment strategies that reduce volatility and significant draw downs.  Buy and Hold strategies should be reviewed and addressed along with one’s risk tolerance and ability to cope with large swings in market values.

*PLEASE NOTE: The information above being provided is strictly as a courtesy. When you link to any of the sites provided here, you are leaving this site. We make no representation as to the completeness or accuracy of information provided at these web sites. Nor is the company liable for any direct or indirect technical or system issues or any consequences arising out of your access to or your use of third-party technologies, web sites, information and programs made available through this web site. When you access one of these web sites, you are leaving our web site and assume total responsibility and risk for your use of the web sites you are linking to. Registered Representatives Offering securities Offered Through First Allied Securities, Inc. Registered Broker-Dealer Member FINRA, SIPC. Allen Yee, CEA, RFC, CA Insurance License #0747874

ING U.S. Encourages More Consumers to Make Retirement Planning and Saving a Priority in the New Year

WINDSOR, Conn., Dec. 21, 2011 /PRNewswire via COMTEX/ — As Americans begin to make their resolutions for the New Year; new findings from the ING Retirement Research Institute suggest that better retirement planning and saving should be high on the list. According to recent findings, 71 percent of Americans do not have a formal investment plan to help them reach their retirement goals.

The ING U.S. study(1) — Retirement Revealed — also showed that while 75 percent of respondents aged 25 to 69 who are employed full-time with an annual income of $40,000 or more are contributing to their workplace retirement plan, nearly half (48 percent) do not feel prepared for retirement.

Read Full Story Here

Guidant Response: Retirement Comparisons, Gen Y and Baby Boomers

News Brief  By: Allen G. Yee

I am absolutely dumbfounded by the statistical information from the TD Ameritrade survey. Given the current state of the economy, enormous unemployment and lackluster stock market it amazes me to hear that the younger generations are saving at a greater rate than those that presumably have greater disposal income. I certainly agree that this is a prime time to be systematically investing in the stock market particularly for the younger generation(s) because of the length of time before retirement and the probability that the equity markets will be greater in the future. Unfortunately, many don’t subscribe to that belief or do not have the foresight or luxury of seeing that far down the road.

*PLEASE NOTE: The information above being provided is strictly as a courtesy. When you link to any of the sites provided here, you are leaving this site. We make no representation as to the completeness or accuracy of information provided at these web sites. Nor is the company liable for any direct or indirect technical or system issues or any consequences arising out of your access to or your use of third-party technologies, web sites, information and programs made available through this web site. When you access one of these web sites, you are leaving our web site and assume total responsibility and risk for your use of the web sites you are linking to. Registered Representatives Offering securities Offered Through First Allied Securities, Inc. Registered Broker-Dealer Member FINRA, SIPC. Allen Yee, CEA, RFC, CA Insurance License #0747874

Gen Y Does Better at Retirement Planning than Boomers

BY MICHAEL COHN, ACCOUNTING TODAY

Members of Generation Y are managing to save for retirement more conscientiously than Boomers, according to a new survey. The survey, by TD Ameritrade, found that members of both Generations X and Y are doing more to save for retirement than their parents and grandparents.

Read Full Story Here

To Convert or NOT To Convert in 5 Easy Steps

What is a Roth conversion? 

A Roth conversion is the process of moving an IRA or employer plan assets to a Roth IRA.

1. When will you need the money?  If you have an immediate need for the funds or need them to continue your current standard of living, then a Roth conversion is probably not for you.  However, if you have no immediate need for the funds, a Roth conversion is potentially a great way for the funds to grow tax-free over your lifetime.

1. Where will the money come from to pay the tax?  In nearly all cases, the money to pay the tax on a Roth conversion should come from outside (non-retirement account) funds in order for the conversion to make sense.  When a Roth conversion is made, it triggers a taxable event, so your ability to pay that tax with outside money will go a long way in determining whether a Roth conversion is right for you.

1. What do you think future tax rates will be?  If you believe your income tax rate will be the same or higher in retirement, then converting funds to a Roth IRA NOW makes more sense, since you will be paying the tax at a lower rate.  On the other hand, if you think your income tax rate will be much lower in retirement, you may want to forgo a Roth conversion and take advantage of lower tax rates in a later year.

1. Other reasons to consider a Roth conversion.  You may have favorable tax  attributes in the year of the conversion such as large charitable deductions, carry  forward losses and investment tax credits; you will not have to take required minimum  distributions starting at age 70 ½; you will have the ability to make contributions even  after age 70 ½ if there is eligible earned income; you can provide an income-tax-free  inheritance to your heirs.

1. Other reasons to NOT consider a Roth conversion.  You have an aversion to paying the income tax up front; you do NOT trust that the government will keep their tax-free deal; you want to make a charity the ultimate beneficiary and it will NOT have to pay income taxes on the money it receives, so why should you?

© 2011 Ed Slott and Company, LLC

Factoring Health-Care Costs into Retirement Planning

There are many factors to consider in determining how much you’ll need to save in order to enjoy a comfortable and financially secure retirement. One often overlooked retirement expense is the cost of health care. You may presume that when you reach age 65, Medicare will cover most health-care costs. However, Medicare currently only pays for a portion of the cost for most health-care services, leaving a potentially large amount of uninsured medical expenses. Without proper planning, health-care costs can sap retirement income in a hurry, leaving you financially strapped.

How much will you need?

How much you’ll spend generally may depend on when you retire, how long you live, your health status, and the cost of medical care in your area. But the costs can add up. You won’t have to pay for Medicare Part A hospital insurance (unless you don’t qualify and have to buy into the program), but you will likely pay either $96.40 or $110.50 each month in 2011 for Medicare Part B physician’s coverage (although you may pay higher premiums based on income and other factors), and an average of $30 per month for Medicare Part D prescription coverage. In addition, there are co-pays and deductibles to consider (e.g., after paying the first $162 in Part B expenses per year, you pay 20% of the Medicare-approved amount for services thereafter).

The cost of health care is rising. The Centers for Medicare & Medicaid Services (CMS) reports that national health expenditures grew by 4% in 2009. And the CMS Office of the Actuary estimates that out-of-pocket spending is projected to grow at an average rate of 5% from 2015 through 2020.

What can you do?

It’s clear that health care is an important factor in retirement planning. And while you may be able to buy a cheaper car, live in a smaller home, or take fewer vacations in order to stay within your retirement income budget, you can’t do without necessary medical care. So what can you do? You can better prepare for these expenses by taking the following steps:

• Acknowledge that paying for health care in retirement is an issue to consider. Don’t presume Medicare and Medigap insurance will cover all your expenses–they probably won’t. Include potential health-care costs in your retirement plan.
• Evaluate your present health and project your future medical needs. That might be easier said than done, but taking stock of your overall health now and factoring in your family’s health history may help you determine the type of care you might need in retirement. Are you currently being treated for high blood pressure or diabetes? Do you live a healthy lifestyle? Does heart disease run in your family?
• Understand what Medicare covers and what it costs. For instance, Medicare (Part A, Part B, and Part D) generally provides benefits for inpatient hospital care, medically necessary doctor’s visits, and prescriptions. But Medicare doesn’t cover everything. Examples of services generally not covered by Medicare include most chiropractic care, dental or vision care, and long-term care. You’ll also have to account for deductibles, co-insurance costs for some services, and a monthly premium for Medicare Parts B and D.
• Consider the cost of supplemental insurance. Medigap plans are standardized policies sold by private insurance companies that pay for some or all of the costs not covered by Medicare. In addition to Medigap policies, other types of supplemental insurance include long-term care insurance, dental insurance, and vision insurance. The type and amount of coverage that’s best for you depends on a number of factors, including how much premium you can afford, what benefits you need, your financial resources, your health, and your anticipated medical needs.
• Don’t forget to factor in the cost of long-term care. The National Clearinghouse for Long-Term Care Information estimates that at least 70% of people over age 65 will require some long-term care services. Medicare does not pay for custodial (nonskilled) long-term care services, and Medicaid pays only if you and your spouse meet income and asset criteria.
• Save, save, save. You may have already begun saving for your retirement, but if you fail to include the cost of health care in your plan, you’re likely leaving out a big expense. Your financial professional can help you figure out how much you may need to save and adjust your retirement planning strategies to account for potential health-care costs in retirement.

Forefield, Inc. Copyright 2011 Forefield, Inc.

What’s the future for Social Security?

By Allen G. Yee

Did the recent debate over the debt ceiling ring any bells about what could be in the cards for Social Security?  As America continues to battle with our economy and the government continues to attempt to prop it up with stimulus plans filled with tax reductions and spending, debates over our ever increasing mountain of debt will continue.

Recently, AARP agreed that reform with Social Security is necessary or will suffer an ill-fate.  I’m certain it was a very difficult decision for the leaders at AARP to publically admit that Social Security requires some tinkering.  It certainly confirms what I (as well as numerous more prominent financial professionals) have been saying for a long time, that Social Security cannot survive in its current form.  Social Security was initially designed in the 1920’s and enacted in 1935 by FDR as part of his “New Deal.”  Our country as well as society has changed significantly since then.  In particular, life expectancy and demographics have given way to an environment in which current Social Security cannot survive.  Today, the average American life expectancy is north 80 years old compared to 62 when the entitlement program began.  Further, when the benefits began there were approximately 42 workers supporting one benefit recipient.  Today, it’s about 3 to one.  Add the enormous amount of baby boomers set to retire and it’s easy to tell the math no longer works.

Between Social Security and Medicare, Social Security is relatively easy to fix.  Medicare has at least six times the unfunded liability of Social Security.  Yet, there was not one word about Medicare in AARP’s pronouncement.

Title: Key Senior Association Pivots on Benefit Cuts

www.wsj.com (The Wall Street Journal, June 17, 2011; Front Page)

http://online.wsj.com/article/SB10001424052702304186404576389760955403414.html

Title: AARP expects Social Security benefit cuts

www.money.cnn.com (CNN Money, June 17, 2011)

http://money.cnn.com/2011/06/17/news/economy/aarp_social_security/index.htm

Title: AARP Says It’s Open to Modest Social Security Cuts

www.nytimes.com (The New York Times, June 18, 2011; section A, page 12)

http://www.nytimes.com/2011/06/18/us/18aarp.html

GAO Report Suggests Annuities as Retirement Income Option

The U.S. Government Accountability Office (GAO) reports that financial experts typically recommend that middle-net-worth retirees use a portion of their savings to buy an income annuity (immediate annuity) to help meet necessary retirement expenses. The report, Ensuring Income throughout Retirement Requires Difficult Choices, finds that while Social Security continues to be the primary source of fixed income in retirement, it is not enough to meet the income needs of most retirees. Also, the shift from employer-sponsored defined benefit pension plans to defined contribution plans, coupled with increasing life expectancies, is forcing retirees to assume more responsibility for managing their savings to ensure that they have sufficient income throughout retirement. An income annuity is an alternative to self-managing savings that offers retirees a steady source of income they won’t outlive.

 
Why income annuities?

Generally, an income annuity, also referred to as an immediate annuity, is issued by an insurance company. It is typically purchased with a single lump sum of money (premium) paid to the issuer in exchange for payments made for life (single life income annuity), or for the joint lives of the annuity owner and his or her spouse or partner (joint and survivor income annuity). Payments generally begin no later than one year from the date the issuer receives the premium. The GAO report suggests income annuities:

• Help protect retirees against the risk of underperforming investments
• Help protect retirees against the risk of outliving their savings (longevity risk)
• Help relieve retirees of the task of managing their investments at older ages when their capacity to do so may be diminished, and
• Provide a base of guaranteed income that may serve as a dependable “cushion” for retirees who might otherwise spend too little for fear of outliving their assets (guarantees are subject to the claims-paying ability of the annuity issuer)

Why income annuities may not work

Income annuities aren’t for everyone nor do they work in every situation. Particularly, income annuities may not be appropriate for people:

• With predictably shorter-than-normal life expectancies
• Who have limited savings, since the funds used to purchase income annuities generally are not available to cover large, unanticipated expenses
• Who are concerned about income taxes, since the income from annuities purchased with nonqualified funds is typically taxed as ordinary income, whereas some or all of the investment return on liquidated savings in stocks, bonds, or mutual funds may be taxed at lower capital gains or dividend tax rates
• Who want to provide a bequest of their assets at their death

When might an income annuity be appropriate?

The GAO study describes examples when an income annuity may be appropriate. In one scenario, the study suggests that a household with a total net wealth of $350,000 to $370,000, of which $170,000 to $190,000 is savings (and which does not have a defined benefit pension plan), should consider purchasing an income annuity with a portion of their savings. Retirees with defined benefit pension plans should consider an income annuity option rather than taking a lump-sum rollover to an IRA. Conversely, an income annuity may not be as useful for households with significantly greater net wealth or those households with appreciably less net wealth.
Proposals to access annuities and increase financial literacy

Typically, defined contribution plan sponsors do not offer account holders income annuities as an option. In response, the study makes several recommendations to promote the availability of income annuities for defined contribution plan distributions. These proposals include legislation that would require plan sponsors to offer income annuities as a choice to plan participants, or set income annuities as the default election for plan participants when accessing defined contribution plan benefits. The study also recommends options aimed at improving individuals’ financial literacy, particularly concerning the risks and available choices for managing income throughout retirement.
Report recommendations

The report seeks to offer options to retirees on how to have an adequate income throughout retirement. Generally, the study suggests that middle-income retirees should consider delaying Social Security retirement benefits at least until full retirement age, consider working longer, draw down savings systematically and strategically (typically at an annual rate of between 3% and 6%), elect an annuity instead of a lump sum withdrawal for employer-sponsored defined benefit plans, and for retirees who don’t have a defined benefit plan, purchase an income annuity with some of their savings. To view the report in its entirety, go to (www.gao.gov/new.items/d11400.pdf).

Forefield, Inc. Copyright 2011 Forefield, Inc.

Recharacterizing a Roth Conversion in 5 Easy Steps

What is a Roth recharacterization?  In the simplest of terms, a Roth recharacterization is an “undo.”  It erases a Roth IRA conversion, and the conversion is treated as if it never occurred.

Meet the deadline.  A Roth IRA conversion can be recharacterized until October 15th of the year after the calendar year of conversion.  That means that either a January 1, 2010 or a December 31, 2010 conversion can be recharacterized through October 15, 2011.  If you miss the October 15th deadline, the only way to get an extension is to go for a private letter ruling from the IRS.

Make a trustee-to-trustee transfer back to an IRA.  A recharacterization must be made via a trustee-to-trustee transfer.  Additionally, regardless of where the funds originally came from, all recharacterizations of a Roth IRA conversion must go to a traditional IRA.

Know the difference between the amount recharacterized and the total funds transferred back to an IRA.  The recharacterized amount is the total dollar amount (NOT the number of shares) of the initial conversion you wish to undo.  But, total funds transferred back must include the earnings (or losses) attributable to the recharacterized amount.  Knowing the difference between these two values will help make sure you report the recharacterization properly on your return.

Find out your Roth IRA custodian’s policies.  Under the Tax Code, you are allowed to recharacterize all or just a portion of a Roth IRA conversion.  Your Roth IRA custodian, however, may not be as flexible.  This is particularly common with annuities or other contractual investments.  In other cases, you may be restricted by account minimums that must be maintained.

Get your money back!  If you recharacterize after you have filed your tax return(s) for the year of conversion, you will need to file an amended return(s) so the IRS, and your state, know that you are no longer responsible for tax on the conversion.  If you’ve already paid all or a portion of the tax, you’ll get those amounts back… plus interest!  

© 2011 Ed Slott and Company, LLC