Savings2Income Spring 2012 Conference

7 Steps to Grow and Convert Your Retirement Savings into
Dependable, Spendable Income

If you are saving and investing for retirement, making the transition to living off savings, or are already retired, you can generate a 10% to 30% increase in spendable retirement income by:

• Lowering Fees and Taxes to Compound Retirement Returns and Increase Income
• Lowering Risks with Broader Asset Diversification
• Increasing Cash Flow  When Interest Rates Are Low
• Making Smart Lifestyle Decisions for Greater Peace of Mind
• Selecting the Right Annuities for a Portion of  Your Income
• Making Best Social Security  Decisions to Improve Your Income and Inflation Protection
• Implementing an Effective Withdrawal Strategy from Principal and Interest

A conference sponsored by Golden Retirement, LLC and savings2income.com to present and discuss these actionable items will be held from 8:30 AM to 11 AM on April 19 at the Westchester Marriott Hotel,  670 White Plains Road, Tarrytown, NY.

The moderator and featured speaker will be Mary Beth Franklin, Contributing Editor at Investment News and former Retirement Editor at Kiplinger’s Personal Finance. Other retirement experts, including me, will speak as well.                    

To register for the conference call: 1-877-502-0082 or go to Savings2Income.com/Registration.html

Social Security Reform – Solving the Annuity Puzzle

In my Op-ed published on December 8 by Bloomberg News (at http://bloom.bg/v2UCRq ), I suggested that the Social Security System could be made financially stronger while giving Social Security beneficiaries more choices about how and when their benefits are distributed.

In last week’s blog I outlined the advantages of a strategy of staging the election of Social Security benefits.

To realize those advantages, we may have to solve a puzzle that, if not one for the ages, has caused academics and marketers to scratch their collective heads – why don’t more individuals elect lifetime annuities.

Well, the same issues apply to Social Security in its current form, as well as under the reforms I am proposing.  Rather than being a question of whether or not to purchase a lifetime annuity with personal retirement savings, the Social Security decision is whether or not to delay election even when any such deferred payment has a fair market-based adjustment to the current payment available.  In both cases the individual is exchanging the current value for a future value fairly determined.

Of course, there are any numbers of reasons, rational or not, for Social Security beneficiaries not to defer: (1) they absolutely need 100% of their Social Security payments to meet current expenses, or (2) they have no faith in the future of Social Security.  However, current experience suggests that beneficiaries are electing Social Security earlier for the same reason that individuals don’t purchase lifetime annuities.  It’s about somehow giving up the accrued value to the issuer (life insurance company or Social Security) at death before they “break even”.

In both of these instances, individuals for the most part don’t “get” the concept of risk pooling for lifetime annuity payments, while they do get it for life insurance, health insurance, and property and casualty insurance.

My proposed Social Security reform would address this puzzle by permitting beneficiaries to stage deferrals, elect survivor benefits, and select caregiver benefits – all on a fair market value basis. 

Bottom line, rather than focusing on the same pieces in the puzzle over and over again, changing the offering would give individual beneficiaries more choices.

The same can be said for commercial payout annuities – there are a wide range of annuities that can help solve the retirement puzzle so many individuals now face. We just need to better educate the public and offer greater annuity flexibility to improve retirees’income plans.

Jerry Golden
CEO, GoldenRetirement.com
Social Security reform that benefits retirees.

 

How Social Security Reform Can Improve Retiree Finances: Jerome Golden

Staging Retirement Benefits – Some Comparisons for the New Age of Retirement

In my Op-ed published on December 8 by Bloomberg News (at http://bloom.bg/v2UCRq ), I suggested that the Social Security System could be made financially stronger while giving Social Security beneficiaries more choices about how and when their benefits are distributed.

One of the questions I received was that if so few beneficiaries elect to defer their payments today, why do you expect them to stage their elections under your reform proposal?

First, there’s a big difference between deferring 100% of your Social Security benefit payments than staging your elections. The 100% election is an old view of retirement that occurs at a fixed point in time. Staging is the new view where retirement itself might be gradual, as well as how one’s Social Security benefits are paid out.

Set out below is a comparison between the traditional approach of electing 100% of the Social Security benefit of say $2,000 per month at age 65 vs. staging the timing as to when Social Security benefits commence. Note in this example, after six years the staged benefit exceeds the benefit elected upfront. In both approaches, we’ve assumed cost of living increases of 3% per year. By age 75 the staged payments are 20% higher than the payments elected upfront.

There are numerous ways to fill in the income gap between the budgeted amount of essential expenses and the staged Social Security payments. It could be from part-time work, income from a spouse or a drawdown from personal savings. Let’s explore the third option.

 Assume that the individual has $200,000 in personal retirement savings, not including any home equity, cash or money market savings, or any funds dedicated for a special purpose. These savings constitute the “Investment Account” in this discussion – a “Social Security Privatized Account” is not proposed.

 While objectives may differ, most individuals will want to achieve the highest level of retirement income with the least amount of risk. The risk is that the retiree runs out of money later in life, and has to cut back on essential living expenses.

 In this example, the individual figures he needs $2,600 per month for his essential expenses – or 30% more than his regular Social Security check. If he elects Social Security upfront he must make up the difference (plus cost of living increases) out of his Investment Account for the rest of his life. If he elects to stage the election of Social Security over a 10 year period he can secure nearly the full amount of expenses, leaving a much smaller amount to be withdrawn each year from his Investment Account.

 The chart below assumes the Investment Account is invested in Treasury securities earning the same long term interest rate of 4% underlying the calculation of the staged Social Security payments. (The example assumes the individual is in the 15% marginal Federal tax bracket.) Under the staged approach the Investment Account at age 85 is $120,291 vs. $99,671 under the upfront approach. 

If we assume that the individual invests more conservatively in short term investments and earns just 2%,  the staged election holds up and the upfront election runs out of money at age 88.

Bottom line: The staged approach may represent a lower risk strategy for the Social Security beneficiary, and in the end may create a greater Investment Account later in life. Staging benefits is likely a better fit for the new age of retirement that eases individuals into full retirement at a later age.

 Finally, under the reform proposal, staging is simply another option available to beneficiaries, and not a substitute for the options available today.

Jerry Golden
advocating sound Social Security reform…www.GoldenRetirement.com

How Social Security Reform Can Improve Retiree Finances: Jerome Golden

Understanding the Monetary Value of Social Security Benefits

In my Op-ed published on December 8 by Bloomberg News (at http://bloom.bg/v2UCRq ), I suggested that the Social Security System could be made financially stronger while giving Social Security beneficiaries more choices about how and when their benefits are distributed.

I indicated in last week’s blog that I would show the advantages of a strategy of staging the election of Social Security benefits.

Before doing that, it’s important to establish a principal not well understood – the monetary value of the right to receive income for the rest of your life from a trusted source such as Social Security, a pension plan, or insurance company. Just because this right may terminate at your death (which can be ameliorated with a surviving spouse or beneficiary option) doesn’t mean it has no value. As long you are of average health, that value can be calculated quite readily – and even if you are not of average health, there is still value.

For example, the value of a Social Security benefit of $2,000 per month for a male 66 in average health could be worth $400,000 or more. That’s the personal store of value referred to in my Op-ed piece. What are the implications of that number?

• It’s large and can represent a significant part of your retirement savings.
• You should have options on how best to utilize that $400,000 of value.
• Delaying the election of benefits in whole or in part (under the reform proposal) can grow that value for future consumption.

Certain commentators described my Social Security reform proposal as overly complex. My responses are: (a) it’s a mistake not to provide the beneficiary more choices with so much at stake;(b) Social Security policymakers and administrators can determine how many choices they offer to individual beneficiaries; and (c) there’s a cottage industry today providing Social Security advice, and with this reform they’ll simply expand their tool set.

 Jerry Golden
Your Retirement Advisor
www.GoldenRetirement.com

Retiree Choices Could Keep Social Security Afloat: Jerome Golden

In my Op-ed published on December 8 by Bloomberg News (at http://bloom.bg/v2UCRq) I suggested that the Social Security System could be made financially stronger while giving Social Security beneficiaries more choices about how and when their benefits are distributed.

Having already received questions about how this may be possible, this is the first of several blogs to provide more detail about elements of my reform proposal. Let me start with answering some of the critical questions.

1. Does my proposal represent a privatization of Social Security and turning over $12 to $15 trillion to Wall Street? Definitely not! It simply involves giving beneficiaries more options with their promised benefits. When the article refers to a personal retirement program, it’s not about a private investment account, but how you could customize your Social Security benefits to meet your personal circumstances.
2. Is the source of the projected savings the result of beneficiaries deferring the election of benefits until, say, age 75 and having Social Security recover their personal store of value at their death? Again, the answer is No, but requires a three-part answer:
• While the headline writer changed the original headline above to “Cash in at Age 75 and Help Save Social Security”, there is nothing sinister about deferral. Under current Social Security rules, you can defer from age 66 to 70 and get a 40% increase in benefits. My proposal simply extends that concept.
• The article states that any increase in the deferred payments reflects both interest and longevity credits. Thus deferred payments give you credit for the expected recovery to the System from deceased beneficiaries. To illustrate, deferral from age 70 to 75 might produce as much as a 70% increase in benefits.
• While some few individuals will elect a 100% deferral, the more likely scenario under this reform is to stage retirement and coordinate the deferral with a savings drawdown and/or other income.  A subsequent blog will show the advantages of such a strategy.
3. Will the future demographics of the country really help when the ratio of active workers to retired workers seems to be decreasing, creating greater pressure on the Social Security system? The answer is yes, but you need to look far enough into the future. While there’s a period with baby boomers retiring when that ratio is decreasing, that phenomenon eventually begins to reverse itself, in quite a dramatic fashion, according to US Census projections. This is particularly true using the Census Bureau’s “high immigration” scenario.

As I wrote to one individual with serious doubts about the proposal, I’m used to some initial skepticism, and I’ve always had confidence in the often predictable stages of any new idea:

*Ridicule
*Resist
*Embrace
*Self-evident

Hopefully, the information in this and future blog will help in beginning the path to the “self-evident” stage.

Jerry Golden

www.GoldenRetirement.com

 

Debt Deal and Market Downdraft Got You Worried?

What you can do to protect your retirement savings.

With mind-numbing stories coming out about who won and who lost the debt deal debate, and whether the debt deal really solved anything or only pushed it to a super committee, individual investors are still bewildered, frustrated and nervous.  Now, with the stock market falling and interest rates behaving in seemingly irrational ways, Americans are skeptical as to the right strategy to adopt today in planning for retirement.

Here are some smart moves that you and other investors can consider making right now that will save you money and perhaps help you sleep a little more peacefully.

Save taxes on additional savings -
Statistics show that investors are on average increasing their savings, and while economists see that as a negative for the economy, I view this as a positive. However, if the savings are invested in accounts, funds, etc. outside a 401(k) or IRA, everyone should be tax-smart with these savings. While we don’t know what any “tax reform” might bring, I suggest you consider investing a portion of your retirement savings in a no load variable annuity (VA). Not only will that enable you to defer taxes on investment earnings until these funds are withdrawn, it could also help result in a lower tax bracket for you. That might be particularly helpful if tax reform eliminates or caps some of your favorite deductions.

In terms of timing, with the value of these taxable accounts taking a beating these past few days, now may be the time to sell a portion of those securities with little or no gain, and have any market recovery take place in a tax-deferred account. Also, with the tax benefits of annuity-investing in otherwise taxable fixed income options, this new VA account could be invested more conservatively.

In general, the time to move up in tax class, e.g., regular IRA to Roth IRA, or taxable to tax deferred, is on a market downturn.

Lower Fees – While the government is
doing some belt-tightening, as are those who may be increasing their savings, why not ask financial service providers to do the same?  That means you should:

1. Look for no load products;
2. Invest  in low cost index funds; and
3. Find an advisor (if you use one) that charges asset-based fees of .50% or less.

These lower fees make any additional savings even more valuable.  If the provider argues that you’ll get more value from their higher fees, then I would counter by stating that in this environment, the economy and the government moves or non-moves trump whatever the provider offers.

These are just two of my Seven Golden Rules intended to dramatically increase sustainable retirement income from Personal Retirement Savings.

You can find the Seven Golden Rules, and more about saving and investing for retirement, at www.GoldenRetirement.com.

Jerry Golden
President
Golden Retirement, LLC
www.GoldenRetirement.com

Derek Jeter – A Hall of Fame Approach to Retirement Investing

During the press conference following the game when Derek Jeter got his 3000^th hit – a home run no less – he was as expansive in his comments as I’ve ever heard him. Since I wrote about “Derek Jeter and Scorekeeping” in April, I’ve been paying close attention to both his on-field performance as well as his off the field comments.

While Yogi may be better known for his Yogi-isms, Derek made a few statements that may apply to both a Hall of Fame approach to baseball as well as to the average investor’s own “Hall of Fame” approach to Retirement Investing.

To paraphrase, Derek said that he might have a bad at bat, or a bad game, or even a bad month, while stating that “I take pride in going out there every single day and trying to be as consistent as possible.”   And he also doesn’t seem to care whether his 3,000 hits are singles, doubles, triples or home runs. This long term winning approach will, in my opinion, assure him a first round election into baseball’s Hall of Fame when he becomes eligible.

And what does that have to do with Retirement Investing.

1. You need to look at the long term, and intraday, daily, weekly, or monthly moves in the market shouldn’t get you down.
2. You need to be in the game to win. Jeter’s longevity and durability enabled him to become the 4^th youngest player to reach 3,000 hits. Investment studies confirm that missing key days in the market can create significant lost opportunities.
3. You should shoot for getting on base rather than the home run. Diversifying between equities and fixed income, and among funds and ETF’s, seems more prudent than swinging for the fences.
4. Finally, as his long term teammates praised Derek for his constant preparation, so too should average investors have a plan (continuously updated) for their retirement Investing.

 Durability, longevity, consistency and preparation – the right approach to a career and to investing.

Jerry Golden
President
Golden Retirement, LLC
www.GoldenRetirement.com

Social Security – A Modest Proposal for Reform

Seems like most of our close friends are concerned about Social Security – everything from the best age to start taking payments, to certain apparently favorable (possibly unintended) opportunities around spousal elections that even the local Social Security office may not be familiar with.  A cottage industry has even grown up around providing education and analysis about Social Security elections.

And it’s just not my age group doing the talking.  Many people under 40 say they don’t expect Social Security even to play a part in their retirement.  The Social Security Board of Trustees in its annual report showed that if things continue as they are, funding will run out in 25 years–just in time for those now 40 and under to start turning 65.

But in the political arena, any talk of reforming Social Security remains the “third rail” – essentially a kind of political suicide.

Mark Twain said that everyone talks about the weather, but no one ever does anything about it.  I’m not running for political office or working at Social Security, so I’d thought I’d see what I could come up with by applying my industry and actuarial experience to this enormous challenge.

Let’s start with the notion that transparency and clarity are essential to any successful financial program, of which Social Security is among the largest for so many people.

Next, let’s do something unconventional:  let’s look first at the benefit side, rather than the funding issue:  after all, benefits are the reason the program exists, and starting there will at least help us properly frame the solvency challenge.  Here are a couple of scenarios I’ve come up with so far:

1. Why not make our benefits transparent by keeping us posted on their actuarial present value, or in other words what it would cost you to purchase those benefits in the market.  Let’s call this “Social Security Benefit Value”.  When I ran some numbers a few years back I found that mine is around $600,000, which was at the time the cost of providing a COLA protected immediate annuity with a starting payment equal to my benefit amount This kind of value can’t be cashed in — but it can be “spent” on a personalized income benefit plan for the individual
2. What if we then permit our Social Security Benefit Value to be used for any number of income possible options while keeping its value constant — based on age, benefit level and market based actuarial assumptions.  So we might take my Social Security Benefit Value, and let me take lower payments in return for providing my beneficiary (spouse or children) at least 10 years of payments.
3. As another example, a new benefit option might be one that lowers current payments, but raises payments if an individual needs care, or uses the value to self-fund a portion of their home care costs.

Transparency of this kind will help us see Social Security as a true benefit with a defined personal value Politicians can then see this value as a liability that has to be funded.   From the perspective of the Social Security Trust Fund I see this approach as extending its life as more retirees elect to defer or stage their retirement.

 If this structure were also adopted in the pension and 401(k) sectors, we could be given more choices, including the ability to better-integrate retirement programs with Social Security. As I mentioned in an earlier piece, such a system for Social Security and pensions could facilitate the new reality of “staged retirement”.

Is this workable?  It’s already been applied in the private sector in the form of what’s called a “flexible immediate annuity contract,” so the administrative technology and actuarial methodology are in place.

But my central point is that there are far more options around Social Security than the headlines would lead you to believe — if we stop focusing solely on the problems, and open our minds to creative new solutions.

Jerry Golden
President
Golden Retirement, LLC
www.GoldenRetirement.com

Are Product Fees the Only Reason Fee-Based Advisors Shun Annuities?

I recently read an article (Investment News, May 19, 2011: “Annuity fees a turnoff for clients and advisors”, by Lavonne Kuydendall) with some interest, having been involved with annuity products almost since their creation (at least in the modern era). While I agree with much of what was expressed by the author, I don’t believe the article fully addresses why for the most part, fee-based advisors haven’t fully embraced annuities for their clients.

Here are my top five reasons:

1. Fee-based advisors are not being marketed to by annuity product providers: As I’ve heard from product managers and distributors, fee-based advisors are an “inefficient” channel that can’t be approached in a scalable way. This is a “chicken and egg” problem—an initial effort has to be made to begin creating sales, which then creates more focus which in turn creates the required scale over time.
2. Variable Annuities represent a “separate platform” which advisors reject: A lot of advisors want to keep their business model simple, and limit the “platforms”, e.g., Schwab, Fidelity, etc, that they deploy. In doing so, advisor convenience may limit potential investor advantages. So it’s back to getting the product providers and/or platforms to make it easy for advisors to add annuities to their product mix.
3. Advisors don’t “get” annuities: Not only do they not understand the admittedly complex operations of living benefit guarantees; they may not even understand the benefits and forms of payout annuities. Which brings us back to “marketing” the benefits, advantages, and yes, even some of the possible downsides – in other words, a balanced presentation that should be expected for any and all retirement investment products that can benefit the client.
4. Annuities undermine the advisor’s value added: The built-in tax control advantages of non-qualified annuities tend to lessen the perceived benefit of the advisor’s tax management schemes. Also, with comparatively limited fund choices in Variable Annuities, the advisor cannot bring the full “power” of their asset allocation and fund/ETF selection. This may be the case; however, the advisor still has the responsibility and obligation to give the client the best “net” solution in all of its aspects.
5. Variable Annuity fees are too high: In some cases, that may be true; however, it’s the responsibility of the VA provider to make the fee structure as competitive as possible. In looking at fees, it’s important to consider all of the relevant fees: (a) underlying fund fees, (b) annuity wrapper fees, and (c) fees for all forms of secondary guarantees. In my view, if (a) and (b) are priced institutionally for the fee-based advisor, then you’ve likely got a fair price.

The insurance company needs to design its products to be meaningful to both the seller (advisor) and the buyer (advisor’s clients) and to market them accordingly. It’s the responsibility of the advisor to be open to all reasonable investment concepts, including annuities, and to recommend to clients the products that best meet their needs.

Towards this end, we have developed in www.GoldenRetirement.com, a website that provides analysis of why and how a low-cost annuity works for non-qualified savings. Over time, we will also show when there are alternatives that are superior to annuities, or when annuities only work in combination with other investments. We hope with places like our website, we can help better frame the discussion to the benefit of all.

Jerry Golden
President
Golden Retirement, LLC
www.GoldenRetirement.com

A Medicare Tax on Some Annuities that You Don’t Have to Hate

Buried deep inside the over 1000 pages of the Patient Protection & Affordable Care Act (PPACA), otherwise known as the Health Care Act (and in some circles, Obamacare) is a provision for a tax of 3.8% on unearned income, including income from non-qualified annuities, to help ensure the continued viability of Medicare.

Soon after the PPACA was signed into law in March of last year, the life insurance industry through its many trade associations, including the Insured Retirement Institute (IRI), criticized this “Medicare Tax” as running counter to the need to encourage saving for retirement with annuities and the guaranteed income for life they provide. Perhaps the industry rushed to judgment, and should reconsider its position. (I was reminded of this industry viewpoint, just having heard oil executives testify yesterday before Congress about that industry’s tax breaks.)

Keep in mind that this 3.8% tax, due to come into effect in 2013, is only applicable to those annuitants whose adjusted gross income (AGI) is greater than $250,000 for married couples ($200,000 for singles). In a report issued earlier this year, the IRI found that only 20% of annuity buyers have incomes of more than $100,000 annually. So this tax will probably apply only to an even much smaller proportion of older annuity buyers/owners who, while drawing income from non-qualified annuities, will have incomes in excess of this $250,000/$200,000 threshold.

Importantly, a Treasury official has clarified that if the contract owner elects an annuity payout, this tax is only applicable to the amount of income in excess of the excludable amount – that portion of annuity income which is considered a return of the original investment in the contract. That exclusion is both fair and valuable to the annuity buyer/owner.

The IRI also made the following point: (“IRS alert: The tax advantages of annuities” by Daniel Williams, Senior Market Advisor, 4/12/2001), “The tax deferred treatment of the inside build-up within an annuity can amount to a significant sum over a period of many years, often resulting in a higher level of savings available at retirement compared to a similar investment that incurs income taxation every year.”

The life insurance industry has never been accused of viewing the business in a holistic way – but for its own sake should favor a sustainable Medicare. By helping to increase life expectancy, Medicare helps defer the payment of death benefit proceeds – while keeping life insurance premiums flowing.

So, in the words of that famous hamburger commercial many years ago – where’s the beef?

The real point is that there’s a positive message the industry needs to focus on: the value of annuities for individuals trying to create a secure retirement.

Jerry Golden
President
Golden Retirement, LLC
www.GoldenRetirement.com