My grandmother was born in 1927. At that time, the life expectancy for women was about 60 years, but here we are in 2013 and she is doing amazingly well. During the last 80 years, technological and medical advances have tacked another 26+ years onto her life. Already she has lived 50% longer than the initial expectation.
My son was born in the fall of 2012. He is expected to live about 80 years. Following my grandmother’s case, he would live to 120 years of age. Put another way, he can expect his pre-retirement and retirement periods to be about the same. Clearly, retirement nest eggs and pensions are going to be stretched a lot further than they ever have been.
This is the trend that we need to plan for. The following are key areas of consideration for our increasing life spans.
Inflation. At 3% inflation, a $100,000 annual income need today becomes $242,726 30 years down the road. This substantial difference requires careful consideration. Do your pensions have an annual cost of living adjustment built in? Have you built inflation protection into your retirement accounts?
Health care costs. Along the same lines, the estimated rate of inflation for health care in 2014 is 6.5%. Should you insure to protect against this risk?
Portfolio withdrawal rate. What is a sustainable rate that can last throughout your retirement period? Is your portfolio structure congruent with this rate? That is, do you have the appropriate mix of stocks and bonds with sufficient diversification?
Your end of life wishes. Statistically speaking, the majority of medical costs occur in the last five years of life. And, there is little doubt that advances in medicine and technology will afford increasingly difficult decisions. Having a clear medical directive can save significant emotional and financial resources.
Savings rate. Pensions are becoming a thing of the past. This has shifted a huge responsibility to the saver. If you are still in your accumulation years, figuring out the savings rate that corresponds to your retirement goals is more important than ever.
As life expectancies increase, so do the complexities of retirement planning. Inflation protection and an appreciable return that keeps up with your distribution needs are just the beginning. If you have not already done so, take the time to meet with your advisor to build a goal-centric plan that is specific to your unique retirement needs.
While corporate pensions are on the decline for many younger workers, many clients nearing retirement still have pensions through their employers. One topic that often comes up with married clients is the question of a survivor option: Should you take a single life option and collect the highest monthly payout, or take a lesser amount and ensure that some percentage would go to your spouse if something were to happen to you?
One solution you might consider is something called pension maximization. The question that we are trying to address then is: Can you buy life insurance to replace the pension for less than the monthly “cost” of taking the survivor option?
We don’t sell insurance, but work with highly qualified professionals that do this full time. We don’t receive any compensation for any insurance our clients buy, but looking at coverage is part of our comprehensive approach to addressing all of our clients’ financial needs.
How does pension maximization work?
Here is a recent example where one client could take a single life pension of $6,041/month or a 100% survivor option for $5,401/month, a “cost” of $640/month ($6,041 – $5,401). When considering the insurance option, we would need to recreate this income stream based on him passing away in year one with the following policies:
A 10yr term policy for $225,000 ($44/month)
A 15yr term policy for $125,000 ($32/month)
A 20yr term policy for $100,000 ($31/month)
A 25yr term policy for $105,000 ($54/month)
A 30yr term policy for $110,000 ($103/month)
A no-lapse guarantee universal life policy for $275,000 ($274/month)
The reason you would layer policies in the above example is because you need less insurance as you get older since the time you need the insurance to last is shorter. When you add up the above policies, you get a monthly expense of $538/month, which is $102/month less than the “cost” of the 100% joint survivor option. After 10yrs, the $44/month policy will drop so you will get a raise of $44/month. By the time the 20yr policy has lapsed, you’d be receiving almost $1,300 more per year than when you started. Also, if the spouse passes away first, then this client could cancel the insurance and keep the premiums or keep some of the insurance to pass on to their heirs.
Who does this work well for?
People who are in good health and can qualify for lower insurance premiums.
People who have kids or family they want to leave money to. If both spouses passed way together early on, their heirs would receive no additional money under the pension and survivor options. However, by using the pension maximization strategy above, this couple’s heirs could receive $940,000 income tax free.
People who are comfortable with a little added complexity. It is much easier to just take the survivor benefit from the company. Dealing with insurance policies and then having to either invest the money or buy immediate annuities (this is what the example above solved for using current annuity rates) with any proceeds takes additional time and effort. The example above had six different policies, but I’ve often seen it work with only three or four.
People who have some time before a decision needs to be made. The underwriting process can take a few months and you don’t want to make this type of decision before life insurance is fully in place.
I’ve looked into this strategy for many clients, and it doesn’t always work out. Sometimes, the company pension option is the best choice and you don’t have to go through any underwriting like you would in the example above. It is important to work with professionals who have the resources and expertise to help you solve these complex financial issues. Here are Merriman, we work with a number of professionals who are experts in their field to help solve problems like this, and other complex issues, for our clients. Please reach out to your advisor if you would like to discuss this option for yourself.
We have all heard the expression, “back in my day…” followed by the amount a particular item used to cost. While it’s somewhat of a cliché, it does carry a lot of weight. The impact of inflation on your cost of living has real consequences, and factoring it into your retirement plan is of paramount importance.
Consider someone who is planning to retire at 66 years old. Current actuarial figures give them a retirement window of about 25 years. Using 3% for average annual inflation, the future value of a dollar 25 years out is $.48. Put another way, you can afford to buy less than half as many goods 25 years into retirement as you could when you started. Fortunately, that is not the end of the story.
There are several ways to insulate your retirement income from the effects of inflation.
One solution has to do with retirement pensions. Once the pension spigot is turned on, one thing that can increase the flow is a Cost of Living Adjustment, or COLA. A COLA increases annual pension amounts based upon the previous year’s rate of inflation. The important thing to know is whether your pension has a COLA. Without one, you will become increasingly dependent upon other assets as time goes on. Remember, 25 years from now a dollar will be worth less than half of what it is worth today. With a COLA, you will still need to understand how your increasing income stream fits in with your other assets and your specific retirement plan.
Another pension source most people have in retirement is Social Security Income, or SSI. The COLA for SSI is tied to the Consumer Price Index. As such, it varies from year to year.
The final piece to consider is your retirement accounts, such as IRAs, Roth IRAs and taxable brokerage accounts. These accounts do not provide a fixed income stream in the sense that a pension does. Typically, they are invested in an allocation of stocks and bonds controlled by you or your investment advisor. Distributions are on an as-needed basis.
Stocks have historically been the best long-term hedge against inflation. In a sense, they act as a super charged COLA for your retirement accounts. How much stock you allocate to these accounts and how the accounts will supplement your pensions requires careful consideration.
No two retirement plans are alike. Understanding how the unique pieces of your retirement puzzle fit together to meet your retirement goals is what’s important. If you have not already done so, take the time to sit down with a professional who can help you figure out where you are, where you want to go and most importantly, how to get there.
It’s no surprise that women tend to live longer than men. Therefore, it should be no surprise that women tend to need long-term care more often than men. In fact, Genworth Financial, a leading provider of long-term care insurance (LTCi), estimates that two-thirds of their benefits paid go to women. However, up until recently, insurers were not allowed to charge different rates based on gender. That may all change in April, when Genworth is allowed to restructure new policies to incorporate gender-distinct pricing, which may increase the rate for single women by as much as 40 percent. Genworth was the first carrier to win approval from state insurance commissions to raise rates on new policies for single women, but it is expected that other carriers will soon follow suit. Long-term care insurance will become much more expensive for this segment of the market.
What should you do? If you are a single woman considering LTCi, you should consider making a move soon. If you are unsure whether LTCi makes sense for you, talk to your financial advisor or a licensed insurance agent as soon as you can.
Client review meetings always give me something to look forward to. Not only do they present an opportunity to ensure we are on track for meeting the client’s financial goals, they also give me a chance to find out what is new in the client’s life.
I especially love hearing about the travel adventures of my clients – everything from the destination and local sights to the food and the culture. For me, it is a great opportunity to learn about new places and always gives me new ideas for my own dream vacation list. I only wish I could share this information with other travel seekers. Fortunately for my clients, I am busy working on their financial plans, and putting together an archive of travel information is not something I have time for. The good news is there are plenty of websites that have already taken care of it.
Frommers is a great place to start. The website has an interactive map of the continents which lets you narrow in on specific destinations. Once you’ve found the place you’re looking for, it offers an array of helpful information, including suggested itineraries, organized tours, and suggestions for restaurants and hotels.
TripAdvisor is another great resource to consult in addition to Frommers. The thing that makes TripAdvisor stand out is its ability to create community around travel. There are thousands of reviews covering everything from activities to restaurants and hotels. There are also forums that allow you to interact with other travelers who can help answer your questions. This site will help you cut through the weeds and create a trip worth remembering.
Once your trip is mapped out, make sure your itinerary is organized. The last thing you want to do is miss a flight or be late and lose out on a hotel reservation. This is where TripIt comes into play. Simply email your confirmation emails to TripIt it will build your itinerary for you to print or access from your mobile devices.
A few other quick mentions:
1) Travel blogs: Once you have a destination in mind, search for blogs that cover it. You can sort through older posts and be alerted when new content is posted. All in all, it is a great way to get “in the know” on your destination.
2) For privately-owned accommodations: try Airbnb and VRBO
Our job at Merriman is to help you invest wisely, freeing up your time so you can focus on living fully.