You Could Live to 100: How to Plan for a Long Retirement

Originally posted July 1, 2014 by Casey David on www.foxbusiness.com.

They say there are only two certainties in life: death and taxes. But that doesn’t mean we have any control over the actual timing of our death, which makes retirement planning hard.

Projecting your life expectancy is a critical part of executing a retirement plan as it determines how much you need in your nest egg and your drawdown tactics.

According to the Social Security Administration, a 65-year-old male has an average life expectancy of 19 more birthdays to reach 84. Women can expect to live a little longer: A female turning age 65 today can expect to live, on average, until age 86. In fact, 1 out of 4 65-year-olds will live past age 90, and 1 out of 10 will live past age 95.

Living longer is good news, but it increases the risk of outliving your retirement savings if you don’t plan accordingly.

Retirement income certified professional and Director at the American College, David Littell, offers the following tips to help boomers plan for longevity risks in retirement:

Boomer: What are some solutions to longevity risks for baby boomers?

Littell: The most direct solution for longevity risk is to increase income sources that are payable for life. This can be accomplished in a number of ways. The best place to start is to defer Social Security benefits to increase lifetime payments. Social Security has an added advantage in that benefits increase for inflation each year as well. Another option is to choose a life annuity payout option—instead of a lump sum—from an employer- sponsored retirement plan.

In addition, there are a number of commercial annuity products that can provide lifetime income. A life annuity can create a stream of income over a single life or over the joint lives of a couple. Annuities can be purchased that provide an income stream starting immediately – or, with a deferred income annuity, income can be purchased prior to retirement. A deferred income annuity can be purchased to limit longevity risk in one’s later years. For example, buying an annuity at age 60 that begins at age 80 can be a cost effective way to limit longevity risk. Deferred annuities can also be used to create income for life as these can be annuitized at a later date, allowing the owner to lock in lifetime income. Deferred annuities can be purchased with riders that provide for a lifetime withdrawal at a rate specified in the contract. Be sure to read all the disclosure before investing in annuity to make sure you understand all the potential risks, fees and terms.

Boomer: How important is it to make a good estimate of life expectancy for planning for longevity risk, and how can we create our own estimate?

Littell: Unless all of a retiree’s income sources are payable for life, part of the plan will be taking withdrawals from an existing IRA and other accounts. Determining how much can be withdrawn each year depends in part on how long retirement will last. So making a reasonable estimate (and updating that estimate over the years) is an important part of retirement income planning.

This process begins by considering average life expectancy. According to the Social Security Commission, the average life expectancy at age 65 is almost 20 years, and there is a one in four chance of living to age 90. In addition, there are some interesting tools available on the web for making a more personal calculation. For example, the Living to 100 calculator provides an estimate based on answers to questions about personal and family medical history as well as questions about lifestyle habits.

Boomer: What is a contingency fund and what is in it?

Littell: One solution to address longevity risk, as well as other risks faced in retirement, is to maintain a separate source of funds that are reserved for these contingencies. A contingency fund can be a diversified investment portfolio. If the purpose is to have funds available if life is longer than expected, then it is appropriate to choose investments that emphasize long-term growth.  A tax-efficient approach is to build this fund within a Roth IRA. With this approach, the value is not diminished by taxes and if the funds are not needed, the Roth IRA is a very tax efficient vehicle to leave to heirs.

A contingency fund does not always have to be an investment portfolio.  It could also be the cash value of a life insurance policy, or a reverse mortgage with a line of credit payout option. Both of those options have limited tax consequences as well.

Boomer: How does longevity risk impact some of the other risks faced in retirement? 

Littell: Some describe longevity risk as a risk multiplier. When a person lives longer in retirement, it means greater exposure to most of the other retirement risks such as inflation, increasing costs for health care and long-term care and more exposure to public policy changes that could put your savings at risk.

Boomer: How can boomers develop an income plan that evaluates all of the risks that retirees will face post retirement?

Littell: Building a retirement income plan requires strategies for creating consistent income to replace a paycheck and address other financial goals, such as leaving a legacy for heirs. But it also requires considering each of the major risks faced in retirement and having one or more strategies to address each risk.

One thing that becomes apparent when looking at all the risks is that the solutions to some risks require locking into income annuities and other low risk investments, while other risks require the flexibility of a diversified portfolio that can be adjusted based on changing circumstances over time. A critical guide for these choices is an informed advisor (such as someone who has earned the Retirement Income Certified Professional (RICP®) or Chartered Financial Consultant (ChFC®) designation from The American College) that can help you react (but not overreact) to changing circumstances.


One-Third of Workers Say ACA Will Delay Their Retirement

Originally posted May 27, 2014 on http://annuitynews.com.

Although the Congressional Budget Office projects a smaller U.S. workforce in coming years as a result of the Affordable Care Act (ACA), the majority of American workers don't believe that the ACA will allow them to retire any sooner, according to a new survey from http://MoneyRates.com. On the contrary, the Op4G-conducted survey indicates that one-third of workers expect that the ACA – also known as Obamacare – will raise their health care costs and thereby force them to retire later than they previously anticipated.

One-quarter of respondents felt that Obamacare would have no impact on their retirement date, and another one-quarter weren't sure how it would impact their retirement. Those who felt Obamacare would allow them to retire earlier were the smallest segment of respondents at 17 percent.

Many of the workers who indicated that Obamacare would delay their retirement said that the delay would be lengthy. Seventy percent of those respondents said they expected the delay to be at least three years, including the 39 percent who said it would be at least five years. The respondents who said they expected an earlier retirement were more moderate in their projections, with 71 percent indicating it would hasten their retirement by three years or less.

Richard Barrington, CFA, senior financial analyst for http://MoneyRates.com and author of the study, says that the purpose of the survey wasn't to determine whether Obamacare would truly delay or hasten anyone's retirement, but rather to gauge the fear and uncertainty that surround the program today.

"It's too early to tell whether Obamacare will actually delay people's retirements," says Barrington. "But what's clear at this point is that the program has created a lot of concern about health care costs as a burden on workers and retirees."

Barrington adds that whether or not these concerns are warranted, there are steps workers can take to better manage their health care costs in retirement, including budgeting for health insurance within their retirement plans, shopping regularly for better deals on insurance and using a health savings account as a way of handling out-of-pocket medical expenses.

"The poll reflects a high degree of uncertainty over the impact of Obamacare on retirement," says Barrington. "One way to reduce the uncertainty is to take active steps to manage how health care will affect your retirement."


10 tips to help employees boost their retirement savings

Originally posted on http://ebn.benefitnews.com.

Even if they began saving late or have yet to begin, it's important for your plan participants to know they are not alone, and there are steps they can take to kick-start their retirement plan. Merrill Lynch has provided the following tips to help boost their savings - no matter what their stage of life - and pursue the retirement they envision.

1: Focus on starting today

Especially if you're just beginning to put money away for retirement, start saving and investing as much as you can now, and let compound interest have an opportunity to work in your favor.

2: Contribute to your 401(k)

If your employer offers a traditional 401(k) plan, it allows you to contribute pre-tax money, which can be a significant advantage; you can invest more of your income without feeling it as much in your monthly budget.

3. Meet your employer's match

If your employer offers to match your 401(k) plan, make sure you contribute at least enough to take full advantage of the match.

4: Open an IRA

Consider an individual retirement account to help build your nest egg.

5: Automate your savings

Make your savings automatic each month and you'll have the opportunity to potentially grow your nest egg without having to think about it.

6: Rein in spending

Examine your budget. You might negotiate a lower rate on your car insurance or save by bringing your lunch to work instead of buying it.

7: Set a goal

Knowing how much you'll need not only makes the process of investing easier but also makes it more rewarding. Set benchmarks along the way, and gain satisfaction as you pursue your retirement goal.

8: Stash extra funds

Extra money? Don't just spend it. Every time you receive a raise, increase your contribution percentage. Dedicate at least half of the new money to your retirement savings.

9: Take advantage of catch-up contributions

One of the reasons it's important to start early if you can is that yearly contributions to IRAs and 401(k) plans are limited. The good news? Once you reach age 50, these limits rise, allowing you to try to catch up on your retirement savings. Currently, the 401(k) contribution limit is $17,500 for 2013. If you are age 50 or older the limit increases by $5,500.

10: Consider delaying Social Security as you get closer to retirement

For every year you can delay receiving a Social Security payment before you reach age 70, you can increase the amount you receive in the future." The delayed retirement credits range from 3% to 8% annually, depending on the year you were born. Pushing your retirement back even one year could significantly boost your Social Security income during retirement.