Its Never Too Late to Start Investing for Retirement

Michael Kitces, director of wealth management Pinnacle Advisory Group, sees it regularly in his financial planning practice: clients who are close to retirement but haven’t saved. “They fall into two groups — either they don’t focus on it, or they are despondent,” says Mr. Kitces. “They think their retirement is doomed — it’s a real lose-lose scenario.”

His clients are not alone. Among workers age 55 or higher and nearing retirement, almost half have saved less than $100,000, according to the Employee Benefit Research Institute. A third have less than $25,000.

The savings shortfall means many Americans face the prospect of retiring solely on Social Security, which replaces just 39 percent of pre-retirement income for the average worker retiring at 65, according to the Center for Retirement Research at Boston College.

But near-retirees do have some opportunities to improve their financial scenario in retirement. Which is not to give up on saving. Therefore, rule number one is to save more. If you don't live below your means, financial freedom is not within your reach.

If you start saving 25 percent of a $100,000 salary at age 50 could potentially have about $650,000 at 65 or about $1,000,000 at 70 (assuming a 7.5 percent investment rate).

So to start, create a household budget to reallocate spending to retirement saving - it is more challenging until your children are out of the house. But if possible, maximize contributions in your 401(k) account and open an IRA. Over the age of 50, you benefit from higher “catch-up” limits on tax-deferred savings, for 401(k) accounts it's $24,000; for I.R.A.s, it's $6,500.

The contribution limit for 401(k)'s and 403(b)'s increased to $18,500 in 2018. Take advantage of the additional pre-tax savings and future tax-deferred growth. The catch-up contribution limit for employees age 50 and over will remain at $6,000.

If you or your spouse has access to a workplace retirement plan such as a 401(k), you may not be able to additionally make a tax-deductible contribution to an IRA if you earn too much. The IRA tax deduction is phased out for high earners. The IRA contribution limit is $5,500, with an additional $1,000 catch-up contribution allowed for those age 50 and over. That’s potentially a total of $31,000 that can be invested in tax-deductible tax-deferred vehicles.

Also, waiting to file for Social Security offers another opportunity to increase retirement income. Social Security benefits, which are adjusted annually to account for inflation, can be claimed as early as age 62, but monthly benefits rise 8 percent for every year that you wait up to age 70, increasing your benefit by over 60 percent.

When investing be wary of high-cost funds, academics agree, generally the lower the cost of the fund, the more you keep – this translates to a larger balance at retirement.

As always, you should seek out a credentialed professional that is fee transparent and offers holistic, evidence-based advice.

CBlakely, CFP®, CTFA              01-2018

Sources: The New York Times, Center for Retirement Research at Boston College,  Employee Benefit Research Institute

Working Past 65 - Considerations for Social Security and Medicare

Living Longer

If you are nearing or at 65 you know there are many decisions you will need to make that will be very important in determining your financial well-being after you stop working. One big consideration that I believe many of us may get wrong is estimating our longevity – we tend to underestimate it.

Case in point, my grandfather lived to be seventy, my father died at seventy two. If I couple that data with the conventional wisdom often cited that states men live into their late 70’s, (and women into their early 80’s) I might expect to make it to my mid 70’s. However, this is mistaken thinking, actual life expectancy is quite a bit longer – the upside! - and it can lead to serious financial consequences – the downside.

The Social Security Administration’s most recent analysis of expected longevity if you’re 50 years old, is 83 years for a woman, and 80 years for a man. This average can be misleading because some will not live to retirement and some will live 30 years in retirement.

In fact, as noted in a recent Wall Street Journal article, 56 percent of all 50-year-old women are expected to live longer than their life expectancy of 83 years and 55 percent of all men are expected to outlive their expectancy of 80 years, according to the Social Security table. This is because the distribution of ages when people are expected to die is a bit skewed with more people living longer than dying early.

So plan to live longer and fine-tune your retirement strategy. This may mean saving more, or for those nearing retirement, reconsidering whether you should work for a few more years and continue growing your retirement accounts.

If you are considering working past 65 there are several very important considerations, although I am only going to touch on two for this post.

When to take Social Security

If you are not planning to live long in retirement then start taking Social Security at age 62. But, if you plan on living into your eighties, consider this, if you defer taking social security until you are 70 ½, the increase in the payout over those eight years is 76 percent – inflation protected! That is a big move up and may make a big difference if you have not been able to save enough for retirement.

What about Medicare

You’re eligible for Medicare at age 65 but what if your desire or need is to continue to work? Hopefully there is someone at work to help navigate this but in many cases you can't rely on your employer for Medicare guidance. Employers frequently provide wrong or confusing advice about when employees should enroll in Medicare.

If you work for a company with fewer than 20 employees, be sure to enroll in Part B during your initial enrollment period. Medicare automatically becomes your primary payer, and your employer's plan is unlikely to pay for any expenses that could be covered by Medicare - even if you forgot to enroll in the government program.

Typically, the insurer will notify you that it will not pay a claim because it should have been submitted to Medicare. If an insurer pays several claims then realizes you are eligible for Medicare -they seek repayment from you. As long as you're still employed, you can enroll in Part B without penalty - and you should do so immediately.

If your employer has 20 or more employees there are different rules. You do not have to enroll in Part B while you're still working. You should** enroll in Part A because it's free for most people, and Part A will be secondary to your employer plan. A spouse who is 65 or older can stay on your company plan and delay Part B until you leave.

If you’re happy with your employee coverage and don’t want to get Part B but are receiving Social Security benefits and automatically received a Medicare card, you can send it back and ask for it to be reissued just for Part A. (You can’t delay signing up for Part A if you are already on Social Security.)

It could make sense to drop your employer coverage if your benefits are inadequate and your premiums, deductibles and other out-of-pocket costs are high. You should compare the benefits and costs of your employer plan with the costs of Medicare, plus Part D and a Medigap policy.

A self-employed person who has an individual insurance policy should enroll in Medicare during the initial enrollment period. Otherwise a policy can coordinate with phantom Part B, meaning that it will pay secondary to Medicare, even if you haven't enrolled.

Once you leave your job, you can enroll in Part B without penalty during an eight-month "special enrollment period," which begins the month after you stop working. To avoid a gap in coverage, be sure to enroll in Medicare a month or two before you leave your job. If you miss this enrollment period, you will need to wait until the next general enrollment period.

**You may run into a bit of a roadblock if you have a tax-free health savings account tied to your employer's high-deductible health plan. Whether you should delay enrollment in Medicare so you can continue contributing to your HSA depends on your circumstances. Employer health care coverage pays primary before Medicare so you effectively don’t need to have Medicare in order to pay your health expenses. This means that as long as you are currently working and you wish to decline Medicare Part B, you can do so and enroll in Part B later when you lose your coverage. However, you cannot decline Medicare Part A, unless, you’re not accepting Social Security benefits. As long as you are not accepting Social Security benefits, you can choose to decline Part A also, which preserves your HSA tax benefit! As soon as you want to stop contributing to the HSA (and if you are still currently working) you can enroll in Part A and get six months of retroactive coverage.

Once you enroll in any part of Medicare, you won’t be able to contribute to your HSA, it’s the law. If you would like to continue making contributions to your HSA, you can delay both Part A and Part B until you stop working or lose coverage from your employer. You will NOT pay a penalty for delaying Medicare, as long as you enroll within 8 months of losing your coverage or stopping work (whichever happens first).

Finding out More

Medicare is a complex service and this post serves only to make you aware of the basics. For more information and help, your state likely offers a free health insurance counseling program (APPRISE in Pennsylvania) designed to help you navigate Medicare. An excellent resource for more information is the Medicare Rights Center's online Medicare Interactive service (www.medicareinteractive.org), which answers many common enrollment questions. Or you can call the State Health Insurance Assistance Program (find your state SHIP at www.shiptacenter.org).

CBlakely, CFP®, CTFA                           02/2017

Sources: SocialSecurity.gov, Medicare.gov, Wall Street Journal

Gamma - The New Investment Concept!

When it comes to generating retirement income, investors arguably spend the most time and effort on selecting ‘good’ investment funds/managers—the so called alpha decision—as well as the asset allocation, or beta, decision. However, alpha and beta are just two elements of a myriad of important financial planning decisions, many of which can have a far more significant impact on retirement income. Morningstar introduced a new concept called “Gamma” designed to quantify the additional expected retirement income achieved by an individual investor from making more intelligent financial planning decisions. This is a must read for planners and for investors who want to optimize their retirement assets. This is the essence of Intelligent Investing!

Read all about it here!

CBlakely  CFP®, CTFA           01-2012

The Financial Problem of Living Too Long - Solved!

If you are one of the 10,000 baby boomers retiring today (or in the next several years) then this post may be of some interest to you because for many, traditional asset allocation is inadequate at confronting retirement risk. Let me explain.

Trying to rebuild a retirement portfolio in a low return investment landscape has many challenges. Importantly there are two risks that really have taken center stage, investment-performance risk and longevity risk. Equity market returns have been lousy for about a decade, prompting new phrases into our vernacular such as, “the new normal” and “stocks suck.” Over the last generation life spans have increased to the point that the fastest growing segment of Americans is the over 100 age group – aka the Willard Scott gang. The odds of at least one spouse reaching the age of 86 is 25 percent.

Since the great recession of 2008 income losses for those nearing retirement, specifically households led by people between the ages of 55 and 64 have taken the biggest hit, a decline of 9.7 percent. During retirement, the income flowing from a portfolio made up of stocks and bonds is sensitive to market fluctuations.  This can significantly increase an investor’s longevity risk, or outliving one’s assets.

Creating a portfolio that confronts and diminishes these risks requires adding longevity insurance into the mix. Yep, you guessed it, I’m talking about annuities.  But wait, Ibbotson Associates research shows that investors can mitigate both longevity and investment performance risks with a carefully constructed combination of a guaranteed income stream and traditional assets such as mutual funds and ETF’s.

Annuities can be expensive (guarantees normally cost more) and hard to understand. Determining how and when to use them can be confusing too which is why few investments are as polarizing, but it is wise to set aside preconceived notions in response to this current challenging environment.  Many retirees should consider ways to turn a portion of their portfolio into pension- like income streams.

A fairly recent innovation in deferred variable annuity (VA) products is the guaranteed minimum withdrawal benefit (GMWB) rider. The GMWB rider for life gives you the ability to protect your retirement investments against downside market risk by allowing you the right to withdraw a fixed percentage of the benefit base each year until death. The benefit base can step up and resets to the high-water mark of the contract value on the rider anniversary date when the market has performed well. The remaining contract value at death will be paid to your beneficiaries, which removes concern about giving up liquidity to your heirs (i.e. if I die early, my family loses).

After deciding whether longevity insurance has a place in your retirement portfolio the next challenge is how much to allocate to this product versus traditional assets. The easiest way is for your advisor to follow up the strategic asset-allocation decision with a secondary “product-type” optimization.  Barring that, a recent Ibbotson study using  Monte Carlo simulation based optimization to find an optimal product-type mix of traditional products and a VA+GMWB by maximizing a utility function at the life expectancy  offers helpful guidelines to product allocation. See the major findings (below):

Ø  The higher the risk tolerance, the lower the VA+GMWB allocation;

Ø  The longer the life expectancy (subjective), the higher the VA+GMWB allocation;

Ø  The higher the age, the lower the VA+GMWB allocation;

Ø  The higher the ratio between wealth and income gap, the lower the VA+GMWB allocation; and

Ø  The preference for bequest has almost no impact on the VA+GMWB allocation.

By adding products that offer guaranteed income for life to your portfolio (if appropriate) you can avoid an extreme outcome (i.e. outliving your assets) and better enjoy your retirement. But, as case studies show investors and advisors must be careful when determining which products and allocation percentages.

CBlakely CFP®, CTFA          Auggie 2012

Sources: The New York Times; Allocation to Deferred Variable Annuities with GMWB for Life, Xiong, Idzorek, Chen (Ibbotson); The Impact of Skewness and Fat Tails on the Asset Allocation Decision, Xiong, Idzorek (Financial Analysts Journal, Vol. 67 #2)

The Retirement Savings Drain: Hidden & Excessive Costs of 401(k)s

I normally write something I feel can help most investors. Occasionally you run across something that just needs to be shared. This eye opening new report from the Demos Organization, authored by Robert Hiltonsmith, is compelling. Highlights below, link to the report at the end.

Though your retirement or bank accounts statements contain no evidence of it, everyone who has an IRA, 401k, or any other individual retirement savings account pays a variety of fees every year. But because these fees are taken “off the top” of investment returns or share prices accountholders generally have no idea how much all of this is costing them.
These fees can be substantial: over a lifetime, fees can cost a median-income two-earner family nearly $155,000 and consume nearly one-third of their investment returns. Worse, these fees are often excessive and financial services companies can get away with charging higher-than-necessary fees for a number of reasons, namely: the savers’ lack of information, the inefficiency of financial markets and individualized investing, and the substantial costs—both in money and time—associated with switching between investment brokers.
This brief sheds light on the hidden costs of 401(k)-type individual retirement plans, details the different types of fees paid by the consumers, and uses an example investment from Demos’ own 401(k) plan to illustrate these fees’ heavy burden on the average account-holder. Using industry data on fees, the brief estimates the high costs of 401(k) fees to a model family over a lifetime of saving for retirement. The brief also explains the causes of the nearly universal excessive fees that investment firms charge to savers, and argues for a wholesale reform of this country’s broken private retirement system.

KEY FACTS

LIFETIME FEES

• According to our fee model, a two-earner household, where each partner earns the median income for their gender each year over their working lifetime, will pay an average of $154,794 in 401(k) fees and lost returns.
• A higher-income dual-earner household, one where each partner earns an income greater than three-quarters of Americans each year can expect to pay an even steeper price: (as much as) $277,969.

OTHER FEE FACTS

• The median expense ratio of mutual funds in 401(k) plans was 1.27 percent in 2010.
• Trading costs vary from year to year, but have been estimated to average approximately 1.2 percent a year as well.
• In the long run, the average mutual fund earns a 7 percent return, before fees, matching the average return of the overall stock market. However, the post-fee returns average only 4.5 percent, meaning that, on average, fees eat up over a third of the total returns earned by mutual funds.
• Smaller 401(k) plans have higher average fees than larger ones. The median expense ratio for plans with less than 100 participants was 1.29 percent, while for plans with more than 10,000 participants, it was 0.43 percent.

TYPES OF 401(k) or IRA FEES

• Expense Ratio Fees: This ratio incorporates the administrative, investment management, and marketing fees charged to savers. Because these fees do not vary much from year to year, they are reported as a static expense ratio and listed both in a retirement plan’s summary documents and the individual prospectuses of each mutual fund in the plan.
• Trading Fees: The costs incurred by a mutual fund when buying and selling the securities (bonds, stocks, etc.) that comprise the fund’s underlying assets. Investment managers of mutual funds pay a fee each time they buy or sell one of the securities that comprise the underlying assets of the fund, and they pass these on to savers via the funds’ share prices. Trading fees vary from year to year depending on the frequency with which fund managers buy and sell the funds’ assets.

Download the report here!

As always, talk to your advisor to find out what you can do to minimize the impact of fees on your retirement nest-egg.

CBlakely CFP®, CTFA           05/2012

401(k) Reform?

Defined contribution [DC] plans - 401(k)s, 403(b)s, 457s, much as they have grown to be dominant, have for many, been a failure. Recent statistics indicate 97 percent of Baby Boomers have not saved enough for retirement. Many, though not all people like the illusion of control, and seeing their balances — it makes the DC plan tangible, even if you don’t get what is really needed at retirement. Our cultural obsession with consumerism may keep us well dressed and living in nicely furnished homes, but it is quietly killing our financial future.



Retirement plan reform has to face three realities. First, people don’t know how much to put away for retirement. The general answer is, for almost all people, put away 15 percent of your gross pay. Next, most people don’t know how to invest, so should be handed off to advisors who will do it for you, being very mindful of costs. Finally, given that many people are poor investors or not interested in investing, offering a low cost annuity option at retirement makes sense as an option. Managing a lump sum on your own as you retire is not advisable for many. Annuitization currently is an option only for defined benefit [DB] plans.


Given the above changes and assuming heavy doses of mandatory participant education yield increased savings rates, this likely leads to much better results for plan participants. This is the sort of plan that would yield better results for most, given that DB plans are out of favor, and participant-directed DC plans lead to high expense/poor results. It may be time to consider a hybrid plan: A trustee-directed DC plan for accumulation and a DB plan for distribution.


In the meantime do yourself a favor and pay off credit cards every month. Put away 15 percent of every paycheck and take advantage of employer 401(k) matching plans. If you can, retain and use the services of an accredited financial planner to help you navigate the retirement investment landscape.


Christopher P. Blakely, CFP®, CTFA, CMFC 03/2012

401(k) Investors Who Use Professional Help Outperform Those Who Don't

Investors who relied on professional help in the form of managed accounts and advice earned nearly three percentage points more than those that did not, according to an analysis of eight large defined contribution plans between 2006 and 2010 by Aon Hewitt and Financial Engines. The plans covered 400,000 participants with a total of $25 billion in assets.

The study found that in those five years, workers who received some form of professional advice experienced higher returns, averaging 2.92 percentage points, net of fees, than those individuals who managed their 401(k) on their own. According to Aon Hewitt and Financial Engines’ projections, a 45-year-old participant who invests $10,000 and receives professional help will have a portfolio valued at $71,400 at age 65, compared to $42,100 for someone who doesn’t get any help.

The study also found that 30 percent of participants were using help in 2010, up from 25 percent in 2009. It also found that younger investors with smaller balances were the most likely to use target-date funds (ouch - the most expensive and worst performing funds offered in plans - usually), and younger investors with larger balances preferred online advice. For those nearing retirement, managed accounts are the favored investment vehicle.

“This research shows the concrete value of professional retirement help during a variety of market conditions, and across age groups,” said Christopher Jones, chief investment officer at Financial Engines. “The help that employers have made available is having the desired effect of keeping participants in diversified portfolios and avoiding costly mistakes.”

The study also found that 38 percent of do it yourself participants have excessive risk levels, and 18 percent have risk levels that are too low. In contract, participants using professional help maintained more diversified allocations with appropriate risk levels, and also employed a rebalancing strategy.

“Exacerbated by continued market volatility, workers not using help are clearly making significant investment mistakes,” Jones added. “Their inefficient portfolios and skewed risk-taking is hurting results—and as the numbers show, the cost is very high.” Indeed very high! High enough to make a significant difference in how you live during your retirement.

CBlakely CFP, CTFA    09/30/11
Source: excerpted from  a recent article from Money Management Executive