CHAPTER 1
HOW MUCH WILL YOU NEED?
Luke 14:28 NIV
Suppose one of you wants to build a tower. Won't you first sit down and estimate the cost to see if you have enough money to complete it?
When potential clients come to us, we always want to get to know them before we discuss finances. If the prospective clients are a couple, we want to hear how they met, if they have children and grandchildren, what those children and grandchildren are like, what the couple dreams of doing in their days of retirement, and what possible challenges they see ahead. If the prospective client is single, we want to know about their past and what they want their future to look like. The questions we are asked from all of our prospective clients are, "Will I have enough to comfortably retire?" or "Can I maintain my present standard of living without running out of money?" We respond by outlining the first steps of our process. We need to:
• Determine what you are spending now and project what you will be spending in the future.
• Determine what sustainable income streams you already have and what sustainable income streams we can create to maintain your standard of living.
We can begin to answer those questions only when we have the information we need.
We use a standard process to figure out what you're spending now and project what you will be spending in the future. First, we determine your average monthly income and if you are adding to savings each month. If your saving's balance is consistently going up, your monthly expenses are less than your income. If your saving's balance is not increasing, you are probably spending all of your income. We use this analysis to determine the average monthly amount required to maintain your present lifestyle. For example, if your monthly take-home income is $6,000 and you spend $5,500 per month, then you are saving an average of $500 per month. We then factor in any large future purchases and new future expenses. Lastly, we must consider any present expenses you will not incur in the future. Once we have done all this we have an idea of how much you presently spend per month and can calculate approximately how much you will spend going forward.
Of course, the biggest unknown in retirement planning is longevity. While your grandparents might have planned for 15 to 20 years of retirement, you may have a much longer planning horizon. Many of today's soon-to-be retirees need to plan for 25 to 30 years of retirement. It's a good problem to have, and fear not, we can help you create a lasting plan. To determine how long we must plan for, we use life expectancy tables and then make adjustments based on your present health condition and family history.
In addition to longevity, there are three other key considerations that must be addressed when determining future expenses. They are inflation, taxes and long-term care costs.
Inflation. Inflation is essentially a decrease in the purchasing power of money. What a gallon of milk costs today might cost double or triple twenty years in the future, depending on the rate of inflation. A peace of mind retirement plan takes into account the effect of inflation so that you don't have to worry about the future cost of that gallon of milk or anything else.
One possible inflation scenario goes something like this: You're planning for retirement back in 1990, in that year you work with your Registered Investment Advisor and determine that your current expenses are $3,500 per month. When you retire in 2018, you will actually need $6,772 to buy the same amount of goods or services as you did in 1990. As you catch your breath, you also spend a few moments being grateful that you consulted someone who considers inflation and plans for it as well.
It is irresponsible to create a retirement plan that doesn't account for inflation — our plans factor in inflation.
Taxes. During working years, taxable income generally increases, therefore taxes generally increase. In retirement, taxable income often levels off or decreases, causing taxes to remain steady or decline. We take a conservative approach and assume taxes will gradually increase unless there is a compelling reason to assume otherwise.
Long-term care costs. A study by Medicare reveals that at least 70 percent of people 65 and older will need long-term care services and support at some time during their lives. If you haven't planned for those costs, they can be the undoing of even the most robust retirement plan. In Oklahoma during 2018, the annual cost for a semi-private nursing home room was $55,265. The annual cost for homemaker services, such as grocery shopping, errands, cleaning and cooking, was $47,133.
It's easy to see how, without a plan, long-term care costs could quickly drain a lifetime of savings. Fortunately, there are options that allow you to plan for the costs of long-term care without siphoning off the money you need to maintain your lifestyle. These options are used in the plans we design for our clients and are more fully discussed in Chapter Ten.
In retirement, many retirees have to choose which bills to pay or which prescriptions to fill because they don't have enough income to pay for all of their necessary expenses. That is not a "peace of mind" retirement. It is critical that we accurately project the average amount you will spend each month for the rest of your life so we know how much income you will need in the future.
CHAPTER 1 RECAP
• Because spending patterns are set well before you retire, and are generally maintained throughout your lifetime, your current expenses can be used to project future expenses. Your spending levels can be adjusted, but realistic retirement plans begin with projected future expenses moderately above what you presently spend and increase over time.
• Chances are you will have a much longer life than your grandparents or even parents. Unless there are extenuating circumstances, it is crucial you plan for at least 25 to 30 years of retirement income.
• Be sure to take into account the powerful issues of inflation, taxes and long-term care costs when planning for how much income you need to retire. These costs can dramatically affect your savings and comfort in retirement. Many plans underestimate or fail altogether to recognize these costs.
CHAPTER 2
LIFETIME INCOME & GROWTH PLAN
Proverbs 21:5 NASB
The plans of the diligent lead surely to abundance, but everyone who is hasty comes only to poverty.
In 2014, the International Foundation of Employee Benefit Plans conducted an online retirement survey for National Employee Benefits Day. The greatest retirement benefit according to the survey was getting to wake up without an alarm clock. The greatest retirement fear was not having enough money to live comfortably for the rest of their lives. Fortunately, this fear can be mitigated by ongoing planning.
At Retirement Solutions and Investment Strategies we construct and update a plan that ensures each client will have more than enough income to maintain his or her standard of living — no matter how long he or she lives! This plan is called the Lifetime Income & Growth Plan and is why our clients can enjoy financial peace of mind either before retirement or in retirement. Like we said in the Introduction, each plan has two crucial components - Income and Growth.
The Income component projects your lifetime income streams, ensuring you don't outlive your income no matter how long you live or how the investment markets perform.
The Growth component projects the growth of assets not needed for income. These assets may be used later for unanticipated expenses or unplanned purchases throughout retirement. They will likely pass on to your beneficiaries at your death, with minimal cost, delay and taxation.
INCOME GAP
Once you start drawing Social Security, it will provide a reliable source of income for the rest of your life. These benefits alone will likely be insufficient to fund the lifestyle you desire. You may also have other dependable income sources, such as pensions, rental income, mineral rights income, investment income, etc. Your income sources combined may or may not be sufficient to provide the retirement lifestyle you desire. Your personalized Lifetime Income & Growth Plan will project both the expenses you will incur during your lifetime and the amount of income you can expect to generate during your lifetime. If your plan projects that your expenses exceed your income sources, you will have an income gap. To fill this income gap we can utilize financial assets you already own to create additional lifetime income sources. There are specific investments that are designed to generate lifetime income.
If you are like many Americans, you may have funds in market-driven investments that were acquired over time. You cannot assess with certainty the income these assets will provide toward your retirement because their value is market-driven. If the market goes down while you are drawing from these accounts you could exhaust the accounts. To address this uncertainty we can redeploy some portion of your market-driven investments into fixed-indexed annuities that can generate stable, lifelong retirement income streams much like Social Security or pension benefits.
To determine if a fixed-indexed annuity fits your situation, start by asking yourself the following questions:
• Are you concerned about finding secure financial vehicles to protect your retirement savings and generate future income?
• Are you concerned that investments in the market may lose value or be insufficient to meet your future income needs?
If you answered yes to either of these questions, you might consider a fixed-indexed annuity. Some of the advantages and disadvantages of fixed-indexed annuities are discussed below.
HOW ANNUITIES FIT INTO A RETIREMENT PLAN
Fixed-indexed annuities are popular, flexible and reliable investments that allow you to generate lifetime income. One of the main advantages of a fixed-indexed annuity with lifetime income is that once the income is started, it will pay you a monthly check for the remainder of your life. If you have an income gap, your customized Lifetime Income & Growth Plan will show when and how much income you will need to fill it. Equipped with this vital information, we can recommend the best fixed-indexed annuity to meet your specific income need. We will also make sure you understand the features, benefits and costs of any annuity we recommend.
A fixed-indexed annuity with an income rider is often used to fill a client's income gap. The income rider allows you to know the minimum income your annuity will pay you for life, starting at a specific time in the future. The income rider creates a separate account, called the income account. This income account value is a calculated number and is only used to determine the amount of income the annuity pays you. An income account is typically larger than the annuity's cash value, and it will increase over time, often at a fixed rate. The income the annuity generates is based on your age when you begin taking income and the amount in the income account. The annuity payment lasts for life - even if the annuity cash value is eventually exhausted. The income guarantee is based on the claims-paying ability of the insurance company issuing the annuity, which is why it is important to select a well-rated company.
The main disadvantage of fixed-indexed annuities is that they are long-term investments subject to surrender charges. In the state of Oklahoma, fixed-indexed annuities can have a surrender period of up to ten years with a decreasing surrender charge starting as high as thirteen percent. Some states allow longer surrender periods and larger surrender penalties. Most fixed-indexed annuities do allow penalty-free annual withdraws of up to ten percent of the accumulation value of the annuity after the first year, but withdrawal percentages may vary.
Another type of annuity that can be used to fill the income gap is a Single Premium Immediate Annuity (SPIA). A SPIA is simply a contract between the annuity owner and an insurance company. SPIAs are structured so that the owner pays a lump sum of money (a single premium) to an insurance company, and the insurance company gives the owner a guaranteed income over an agreed upon time period or over their lifetime. Again, any guarantee from an insurance company is based on the claims-paying ability of the issuing insurance company. It is, therefore, important to select a well-rated company.
While there is general faith that the market will trend up over the long-term, you may not wish to take the risk of losing money in a fluctuating market. Beyond market volatility, interest rates also come with an inherent level of uncertainty, making it hard to create a dependable future income stream on your own. SPIAs reduce these risks by giving you regular income payments that can begin the moment you buy the contract.
However, Single Premium Immediate Annuities (SPIAs) are a less popular means of filling an income gap compared to fixed-indexed annuities with income riders because once the SPIA payment stream begins it cannot be changed. Because of this lack of flexibility, we rarely recommend SPIAs.
OTHER SOURCES OF LIFETIME INCOME
Social Security. Social Security is the most common source of lifetime retirement income. Unfortunately, many people do not receive their maximum lifetime Social Security benefits because they begin taking their Social Security benefits at the less-than-optimal time, or they fail to use the most beneficial filing strategy for their situation. The next chapter discusses how to choose the optimal time and manner to receive your Social Security benefit so you and your spouse, if you have a spouse, will receive your maximum lifetime Social Security benefits.
Pensions. Pensions were once the most reliable source of retirement income, but they have become increasingly scarce in recent decades. That said, pensions do still exist, and in fact, some people have several of them, resulting from working several jobs that offer pensions. Pensions are defined benefit plans, structured and managed by your employer. They typically require (or allow) no management from the employee.
You might be owed pension payments from a previous job and not even realize it. If you think you might be eligible for a pension, or you aren't sure, it's worth checking. According to the Pension Benefit Guarantee Corporation, more than 38,000 Americans haven't claimed pension benefits they are owed, resulting in more than $300 million dollars of unclaimed benefits.
Mineral rights. Mineral rights that can be leased or that can provide royalties have the potential to be an income source for life. However, income from mineral rights is less reliable than Social Security or a pension income and is therefore used in most retirement plans as a temporary source of income.
Mineral rights can also be sold outright and the proceeds reinvested in more reliable income producing assets. Deciding what to do with your mineral rights and how to structure them to optimize your income are decisions we can help you with.
Inheritance. Baby Boomers are expected to receive $8.4 trillion in inheritances. Unfortunately, only 15 percent of all Boomers will actually participate in this wealth transfer and less than 10 percent of those will receive at least a six figure inheritance. But, if you are one of those lucky people receiving a significant inheritance and you handle this inheritance wisely it can make a huge difference in the security and comfort of your retirement. On the other hand, if you make any number of common inheritance mistakes you can end up with a huge tax bill you must pay. Even worse, those sudden, large amounts of money seem to disappear much more quickly than carefully distributed, monthly payouts.
We can help you and your loved ones receive maximum benefit from inheritances.
CHAPTER 2 RECAP
• We create a personalized Lifetime Income & Growth Plan for each client. The retirement income portion of the plan projects both lifetime income needs and lifetime income sources. If income needs exceed income sources then there is an "income gap" that must be filled.
• To fill an "income gap", one of the financial instruments we recommend using is a fixed-indexed annuities with an income rider. This instrument will generate monthly income for life at any chosen time in the future.
• The growth portion of the Lifetime Income & Growth Plan projects the value of the assets that are not used for income generation. These assets can be used to supplement projected income or can be passed on to heirs. Legacy assets are discussed in detail in Chapter Four.
