Tag Archives: retirement income

Can There Be Guarantees in Retirement?

  By petillo | July 12, 2010 - 5:41 am | financial planning, Repercussions: A Retirement Review, Retirement Planning Target 2025
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Can there be guarantees in retirement? Can we hope to be able to know how much retirement income we will need, whether we have invested enough in those retirement accounts to outlast our finite number of heartbeats and whether the costs while we are working will be worth the payoff in the end?

In a recent poll conducted by InvestmentNews of 500 advisors and 500 investors, some of whom were under advisement and some of whom chose to go it on their own, “Retirement income emerged as an overriding issue in our poll, which examined investor and adviser attitudes across a broad spectrum of financial and investment concerns.”  Keep in mind, the potential client base that is developing over the next 10 years, projected at 100 million has these folks very excited.  Finding the next best selling point to get those so far uninterested in advice interested will be an ongoing topic of surveys for some time to come.

It is widely believed, and many of these kinds of surveys point towards this conclusion that we have changed, in some instances, dramatically. What was once believed by a vast majority of us to be a market without retreat turned out to be one that could and did what was completely unexpected.  Riding decades of positive or near positive returns lulled us into the expectation that this was the norm and would go on forever.  Markets we thought, always go up.  They sputter, sure, but these sorts of pauses were simply ways for investors to catch their collective breaths before the next climb up the charts.

Now advisors don’t have it so easy.  Everyone’s portfolio fell in tandem in the 2008-2009 crash.  Those with advisors blamed their advisors and those without had no one to blame but themselves (and a whole host of emotional decisions and Wall Street to main street missteps).  But those that did it on their own had not shelled out for advise that in many cases proved worthless.

So advisors are worried that there message needs to be honed.  Regrettably, “The “magic bullet” for retirement income remains elusive” according to the IN survey.  And the answers the advisors can draw from this exercise don’t suggest they have reached any concrete conclusions.

Diversifying bond portfolios away from the comfort zone of Treasuries is one interesting idea.  In the face of what could be a maturity wall next year in the fixed income world and the rising sentiment that the deficit needs to be addressed, unusually low inflation, and the continuation of the global recovery make this suggestion somewhat suspect – if you have to pay for the advice.

Advisers will also be focused on the Social Security aspect of retirement income.  Running through the various scenarios – as many people are opting for the early retirement benefit – will be at the top of their conversations with clients.  there hope is that with these efforts they can “effectively maximizes the lifetime value of Social Security benefits”.

According to Frank M. Porcelli, managing director of U.S. retail at BlackRock Inc.: “Advisers traditionally help[ed] clients plan a retirement income stream based on a withdrawal of a fixed dollar amount and an anticipated asset growth rate.” Now they are advised to take a more fluid approach, changing withdrawals frequently based on current needs and potential income streams that could be altered by market situations.

In all of these instances, the income stream, both for the client and the adviser is guaranteed, more for the later group than the former.

To read the full article, click here.

The Suitability Standard

  By petillo | June 1, 2010 - 6:25 am | 401k, IRA, Repercussions: A Retirement Review, Retirement Planning Target 2025
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The Securities Industry is governed by several standards. I mention the fiduciary responsibility that you expect when you are put in a position of vulnerability, and this is at the heart of what a fiduciary must consider when recommending any sort of investment. It suggests that you are trusting the experience of someone with more information to do what is right based on a good faith agreement, a belief that your loyalty will be returned when the fiduciary puts your interest before theirs.

Often referred to as the weaker cousin of the fiduciary standard, the suitability standard allows the client to be led to the products that are for the benefit of the person recommending them, such as in compensation for the sale, and may be for the benefit of the person buying them or investing in them.

It is easy to confuse the two and in many instances, we place trust where trust has been relegated to the shadows. This is most suspect when we approach retirement planning. If we ask the questions we are supposed to ask ourselves and anyone doling out advice (specific advice about where to invest, not generalities such as “buy small-cap funds”), we will reveal which standard is applied and when.

For instance, you are told to invest in your 401(k), it is made easy for you to access, it has tax benefits, and in many cases, the incentives such as a company match give you the impression that this is what you should do if you hope to achieve a well-financed retirement. The suitability standard would most likely apply in the situation in part because the plan sponsor will make money from the arrangement, the company will save money from the arrangement and you can benefit as well as long as you participate. If you choose not to, then a no-harm-no-foul situation unfolds. (There is harm in not participating in your 401(k) which is the best alternative most of us have to poverty in retirement but the choice is wholly yours.)

The fiduciary standard applies when the company offers the products to you and in doing so profits from them. If the plan sponsor suggests that the business would do better from a fee management point of view if they offered a certain mix of funds or limited funds to a certain type, they would be violating the trust you placed in them to help you get to retirement. Right?

They may have violated a legal standard but the choices you make, just like all the choices in your life, are yours. How you you use them can be influenced by other, more-smarter-than-you types who appear to be experts or at least have your best interest in mind, but the choice is still yours to make.

And those choices are surprisingly numerous. I have been suggesting that you use your 401(k) in a manner that does not fit with the norm. The axiom “max-it-out” may seem like good advice but what if, as is often case, the plan you have to work with isn’t really much of a plan, with poor choices or simply so many as to make the task doubly difficult? Should you commit $16,500 to a plan that might not be worth your while? Yes and no.

Keep in mind, the 401(k) you have in your workplace is not your only choice. But it probably is your best option. Your 401(k) plan is a tax-deferred option for retirement that allows you to invest now and pay the taxes when you retire on not only the income you use to make the investment but the returns on those choices.

Yet who can say with any certainty this will end up being the best tax solution? Who can say, with any conviction that the tax rate on your current income will be less than the income tax rate you might experience in retirement? Which standard applies?

But as I said earlier, you have choices and using your 401(k) for some of them is important. But for all of your retirement money? if you were to use your 401(k) for up to 6-10% of your pre-tax income, invested in a less tax-efficient way (read: actively managed funds that assume more risk than index funds, target date funds or ETFs) and then looked outside your 401(k) for another investment, you might find that approach more suitable.

Outside of your 401(k), you could open a Roth IRA and in it, buy a tax-efficient investment, one that allows you to invest in taxed dollars in an investment with low-tax implications. This would be a hedge against the possibility that your tax rate will go up, higher than it is right now and if it doesn’t, you are no worse for the method.

Once you max out the Roth IRA, then move back into your 401(k) and if it is possible, max-it-out. Not his sort of employment of these retirement tools gives you more choices in how and where to invest. Yet, most of us will not put 6-10% in our 401(k). And no matter what method we use, which standard we want to apply, under-investing will be the biggest problem we will face in retirement and the hardest to reconcile with the image in the mirror.

Peeking Inside Your 401k

  By petillo | November 23, 2009 - 3:23 pm | Retirement Planning Target 2025
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A short while back, I wrote about a company that uses a series of benchmarks and mathematical equations to determine whether your 401(k) plan is doing what it should. Brightscope’s product was designed to help plan sponsors find the problems in their plans and make an effort to correct them. As noble as that effort may be, the hurdles are numerous for plan participants to get their companies to make the necessary changes to their plans.

Now we have another entrant to the market place, this one offering the plan sponsor a look a their employee’s retirement readiness. Fiduciary Benchmarks, based in Kansas will provide a snapshot look at a company’s plan and the chances that their employee will arrive at retirement with enough cash to be considered adequate.

Using 100% as the retirement readiness benchmark, a number that represents different things to different income groups, the report, provided free in brief and at the cost of $100 for more detailed analysis looks at the average employee. From there, the report then analyzes various pathways that employee can take, and if they did, how well the plan allowed them to reach the optimum amount in their retirement accounts.

In a downloadable pdf, they suggest that a person earning $20,000 a year will need 94% of their pre-retirement income to survive. Although the plan does take into account conservative longevity predictions and the available investments in the plan, it does not look at the statistics for this particular group and their overdependence on Social Security benefits.

Their benchmark also suggests that someone earning three times that amount would need only 78% of their working income to hit the 100% mark in the company’s index. Some industries fair much better than others. But this is not reflective of the whole of the employees in the plan, simply what the plan may do for you should you use it to its fullest.

And therein lies the rub. Most employees, no matter how good the plan, do not max out their retirement contribution, leaving them with a huge gap in what they will need and what they enter retirement with. Without full participation, there is little another tool for plan sponsors can do. The vast majority of plans are adequate even if they fall short on the educational side.

While there is emphasis on educating the participant through education of the plan sponsor, it is beginning to seem a little overdone, even as this type of spotlight is still in its infancy. Most employees wonder why their plans weren’t improved sooner. And still more see the incremental improvements as a way to sustain the current level of contribution rather than an enticement to increase it.

The real improvement will come from the IRS. Once they fix the expected tax rate for retiree’s plans when disbursement begins, and not leave the rate the big unknown, employees will see the future through a much clearer light. Not having any idea what those future taxes will be make it difficult to determine how much will be enough.

Paul Petillo is the Managing Editor and author of Target 2025.com