• 7 Deadly Mistakes

  • Retirement Mistakes

    Preface:
    The information provided in this booklet is not designed to provide legal, tax, or investment advice. Future Benefits and its agents or employees do not provide legal, tax or investment advice. We recommend that you contact the appropriate professional for advice in these areas.
    Future Benefits agents or employees do not recommend the liquidation of securities as they are not securities licensed. Consult with your own broker/dealer or registered investment advisor for guidance on your securities holdings.
    Future Benefits agents or employees do not work for Social Security and do not give legal or Social Security advice. You are encouraged to consult your attorney or the Social Security Administration via their local office or online at ssa.gov.


  • Retirees and those rapidly approaching retirement should ask themselves the following questions:

    Am I confident beyond a shadow of a doubt that my income stream in retirement will afford me the luxury of fulfilling my retirement dreams (even if my health fails, my cost of living rises, I live longer than expected, or my investments do not perform as expected)?

    Isn't this an extremely important question you must answer to make sure your retirement is secure? No one gets a redo during retirement. If we mess it up, we do not get to turn back time and work another 30 years to rebuild. If your income sources fail in retirement, then what? Income is your life blood during retirement! Everyone has different circumstances, but most of us have the ability to create a more secure retirement for ourselves. To do this, we must first identify areas of risk and then choose the appropriate financial tools to minimize our exposure to these risks.

  • Americans are living longer. An overwhelming percentage of those retiring in their sixties will live into their 80's, 90's, or longer. Because of our increased longevity, our retirement savings are more vulnerable to inflation and personal health care expenses (including the possible need for long term care). Consider these statistics regarding longevity for a couple age 65 today:

    • The average man has a life expectancy of 84, while the average female has an average life expectancy of age 86.*
    • The man has a 20% chance to live to age 90, while the woman has a 32% chance to live to 90! **
    • For a couple both age 65 today, there is a 65% chance that at least one person will make it to age 85 and a 15% chance that one person will make it to age 95! ***

    Also, advances in medicine and surgical technologies may increase life expectancies even further.

    Some of us may die young without a need for long term income, but this could leave a spouse or loved one in a position of financial hardship.

    Yet, for most of us, the odds are we will either:

    #1- Live 20 to 30 years or more during retirement or

    #2- Fall ill and possibly need expensive care in retirement or

    #3- Both live long and need expensive care.

    For couples, there is a distinct chance that each spouse may experience different scenarios. Sometimes both spouses are affected by inadequate planning. Often times, it is the surviving spouse who is affected the most. Since women have longer life expectancies, typically it is the female who is left with reduced income.

    Are you sure that you and your spouse will have enough? If you are not 100% sure that you can maintain your standard of living during retirement and would like to be more confident that you will have enough money, this e-booklet was written for you. Its purpose is to educate those approaching or already in retirement about potential retirement mistakes that could reduce or eliminate income streams entirely. In this booklet, we will discuss retirement risks to your income and potential strategies that could be used to protect yourself or your spouse before and during retirement. Along the way, if you are reading this in e-book format, you will find links in this book underlined in blue that will direct you to our website for more information about specific topics.

    For those approaching or in retirement, making sure you will ALWAYS have enough income during retirement is a very important issue you should explore now! Why explore this now? Unless you are absolutely certain that you will always have enough money throughout retirement, now is the time to correct mistakes and change the trajectory of your retirement!

    Another reason not to wait and take action now is that most strategies used to protect your retirement income are more effective the earlier you implement them. Whether you are talking about insuring a risk, saving for a guaranteed income stream, or leveraging against a risk, there is one fact that usually holds true: The earlier you take action, the more income you will have (and the more certain it will be that you can employ a strategy effectively). The difference between starting now and waiting could mean the difference between being uncomfortable financially in retirement (eating beans 5 nights a week and worrying) verses being able to live comfortably, travel, or accomplish other bucket list items during retirement without worry.

    So let's break down the basic risks, and then we will look at each particular risk individually and examine potential solutions to protect you and your family from loss.

  • Retirement planning mistakes (before and during retirement) that could cause you to not have enough money during retirement include:

    1. Not saving enough before retiring (or not knowing how much you need to retire comfortably)
    2. Not preparing for lost income when a spouse passes
    3. Too much investment risk
    4. Not having enough guaranteed lifetime income
    5. Underestimating inflation during retirement
    6. Making Poor Pension or Social Security decisions
    7. Not preparing for the possibility that either spouse could need long term care (the big X factor)

    Now that we have numbered the retirement mistakes, let's look at each risk individually.

  • Retirement Risk #1-Not saving enough for retirement (or not knowing how much money you will need to retire comfortably).

  • How much you save specifically for retirement, otherwise known as your retirement nest egg, is very important. Everyone knows that living on Social Security only is a very gloomy proposition. The old 3 legged retirement stool model says that we should plan to live off three types of retirement money:

    1. Social Security
    2. Pension Income
    3. Income Generated from Your Savings

    If you are not retired yet, you would certainly be making a mistake by not contributing to a retirement plan that offers potential tax advantages. **** For some of us, the 401(k) is our primary savings vehicle because our employer matches our contributions at some percentage up to a certain limit. However, many feel that there are huge flaws with 401(k) plans (see the video link on our website under the heading on our website IRA, 401(k) & 403(b) Rollovers). If you have retired or change jobs, you may be able to roll over your 401(K) to a plan with more choices. Some employers also allow you to roll part or all of your 401(k) balance while still you are still working (these are called in service withdrawals). Many savers choose to diversify from their 401(k) by starting an additional Roth IRAs or non-qualified annuity.

    Do you know how much you need to save before retiring? In other words, how much of a wealth basis do you need to grow in your retirement plans to generate enough retirement income from your nest egg (remember this nest egg needs to last even as expenses grow in retirement). There are many variables to consider. When do you plan on retiring? Do you have a huge pension and feel that you will have to dig very little into your retirement savings (if you are, you are one of the few). How much are your estimated expenses in retirement verses expected income streams? We can help you pinpoint needs and set realistic goals you can attain. In addition, instead of having to guess how well your investments will grow before retirement, we can give you guaranteed growth for you future income stream. Often, a fixed indexed annuity with guaranteed growth can help you safely accomplish your income planning goals (see Guaranteed Growth and Lifetime Withdrawal Basics).

    Click here for an assessment of how much income you could generate safely.

  • Retirement Risk #2-Not preparing for lost income when a spouse passes.

  • Losing a spouse is always a devastating loss, but poor planning can cause a lifetime of financial hardship for the surviving spouse. There is usually no excuse not to protect against a financial catastrophe or an expected reduction in income. There are two different types of situations here.

    A. An unexpected death of a spouse before retirement. This can stop a retirement plan dead in its tracks. Debt elimination and wealth accumulation goals could fall by the wayside, or retirement savings could be needed to pay monthly expenses. This is why life insurance is so important before retirement (see Top Reasons for Life Insurance). Do you have enough life insurance to protect your spouse, and does your spouse have enough to protect you?

    B. A loss of a Social Security check or pension benefits. For couples, when the first spouse dies the higher Social Security check will remain and the other check will be lost. This is usually a considerable loss for the surviving spouse. Also, many pensions reduce or disappear for the surviving spouse. Many retirees purchase life insurance or annuities with enhanced death benefits for this situation (see Annuities with Enhanced Death Benefits). Some designate a portion of retirement savings to grow until one spouse passes away for the purpose of generating an income stream for the surviving spouse.

    Click here to find out how much life insurance or annuity benefits you need to replace lost spousal income.

  • Retirement Risk #3-Too much investment risk.

  • While there is a place for investment risk for some, others do not feel that risk is appropriate for their retirement savings. It is a common belief among many that the closer a person gets to retirement, the more conservative they should be with retirement savings. Once in retirement, many feel that being conservative becomes even more important as the opportunity to replace retirement losses with future wages diminishes.

    Since 2000, the markets have seen much more volatility than in the 1980's and 1990's. Financial indexes have been a long roller coaster (see Rethinking Retirement). Simultaneously, the long-time popularity of bank CDs has diminished tremendously due to the extremely low interest rate environment. Many who might have stayed away from the market if CDs were more dependable or paid more are now risking their money in investments subject to market value fluctuations. Market fluctuations can cause two concerning issues:

    1. There is an inverse relationship between gain and loss and
    2. Taking income from a declining asset can make it much more difficult for that investment to recover.

    As an example regarding point #1 above, did you know that if your account value loses 50% of its market value over a period of 2 years (losing 25% the first year and 33.3% year 2) , it would then need to gain 100% just to get its value back? If after the negative year the investment grew at 15% per year every year it would take five more years for the investment to get back to even (see Avoiding Negative Years.)

    To prove our point about issue #2, let's look at the same example and add the variable that you were taking 6% of the original investment annually at the end of each year. By the end of year 2, only 40% of the asset value would be left. Even if the investment made 15% every year going forward, the investment would never be worth even half of the original investment as long as the same income was being withdrawn. If it started making less than 15% (let's say only 10% annually), the asset would eventually deplete itself. Now what if the investment did not make 10% or 15% every year?

    So how can you protect some of your retirement accounts from loss but still have the potential to earn reasonable interest? A fixed indexed annuity is a viable option. These are not investments, and no comparison can be drawn to investments. Instead, it is an alternative to market risk. With a fixed indexed annuity, you can earn fixed interest by being linked to an external market index. You have limited upside potential linked to an index, but you have no downside risk of market loss. With most contracts, you make interest in contract years when the index you are linked to has positive movement. Once earned, interest is usually locked in. ****In years when the market index you are linked to has negative movement, your contract values are not reduced by the negative index performance. You have the chance to earn money, but the value of your premiums can not reduce unless you choose an annuity with a rider that has a fee. (See Basics of Fixed Indexed Annuities.)

    Click here to get more details on Fixed Indexed Annuities as an alternative to investment risk.

  • Retirement Risk #4-Not having enough guaranteed lifetime income.

  • Before the 401(k) was made available in the late 1970's, company pensions were the norm for most full time employees in America. After the 401(k) was introduced, companies quickly figured out that offering a 401(k) plan was much less expensive than offering a pension plan. Consequently, many companies greatly reduced their pension plans or eliminated them altogether.

    Perhaps one of the biggest flaws about the 401(k) is that participation was voluntary. Employees were now making the decision of whether or not they even wanted to contribute to a retirement plan. With a pension, they would have had an additional check for life guaranteed. In addition, even when employees experienced growth in their 401(k), many never converted those assets into guaranteed lifetime income. These facts, combined with volatile financial markets in the 21st century, have caused many retirees to have a less certain retirement future.

    In 2013, a very important article came out in the Wall Street Journal regarding a rule of thumb retirement planners have utilized for years when planning their client's withdrawals from investments. According to the Wall street Journal Article On March 13, 2013 entitled Say Goodbye to the 4% Rule, "If you had retired on Jan. 1, 2000, with an initial 4% withdrawal rate and a portfolio of 55% in Stocks and 45% in bonds rebalanced each month, with the first year's withdrawal amount increased by 3% a year for inflation, your portfolio would have fallen by a third through 2010, according to investment form T. Rowe Price Group. And you would be left with only a 29% chance of making it through three decades, the firm estimated" (see Not Outliving Your Money).

    The more guaranteed income you have, the greater your retirement security really is. An annuity can provide you guaranteed income for life. If you are close to or already in retirement, this may be a great time to convert some of your retirement accounts or non-IRA money to an income you can never outlive. If you are not yet at retirement, you may have several years to let your guaranteed income for life check grow. The longer you have to wait to turn on your lifetime income check, the larger your guaranteed check can be (see Guaranteed Growth and Lifetime Withdrawal Basics).

    Click here to see about getting more income for life guaranteed.

  • Retirement Risk #5-Underestimating inflation during retirement.

  • This has got to be one of the most popular blunders for many people planning their retirement income. Although Social Security currently does have a COLA (cost of living adjustment), many pensions do not. Often, retirees do not even consider that their other income streams from retirement accounts should continue to increase as well. Many use the logic that by age 75 or 80, they will not be going on as many trips or leaving the house as much. This may be true to the point that activity is a function of health. As health fails, often health related expenses may increase in the place of activity costs. The simple fact is that expenses will increase in retirement, and the negative effect compounded inflation has on the purchasing power of your money will be more dramatic the longer you live.

    We gave some statistics earlier about life expectancies. Now let's take this information regarding life expectancies and project inflation to see how this will affect how much more income we will need as we grow older. To project this, we must pick an estimated rate of inflation. We can look at the Consumer Price Index's historical date. From 1983 to 2013, the CPI had an average increase of about 2.85%, while from 1973 to 2013 averaged an increase of about 4.25% (because of an inflationary decade).***** Although the past is no sure indication of the future, we think it is safe to estimate a minimum of 3% inflation annually (knowing that it could easily be 4% or more).

    So what if inflation ranges from 3% to 4% in the future? If you need $4,000 per month today, this would mean that in 15 years you would need around $6,200 to $7,200 per month. In 25 years you would need around $9,700 to $10,600 per month! Even if you are much less active in your eighties or nineties, you may need a lot more income.

    Are you confident that increases in your Social Security or pensions (if your pension benefits increase) will keep up with this rate of change? If you are planning to use your savings to supplement your income, increased costs could deplete your retirement funds.

    There are ways to structure guaranteed income checks in a laddered fashion so that multiple checks are turned on as you get older. There are also checks available with increases that help keep up with inflation (see Creating Your Personal Pension Type Check).

    Click here to get a personal analysis of your situation and see how your guaranteed income can rise over time.

  • Retirement Risk #6-Making poor pension or Social Security decisions.

  • Social Security and pension decisions will affect you (and your spouse if you have one) for the rest of your life. Many people do not make the optimum choice, costing their family tens of thousands of dollars over time. These are huge decisions!

    What many people do not know is that there are some tricks to making decisions on both which could put a lot of money into your pocket over time. Let's look at each:

    Pension Decisions

    If you are fortunate enough to have a pension, it is prudent to obtain estimates of your pension years in advance and on a periodic basis. Doing this helps you understand how much income you can expect to collect. What is very important to realize is that all of your options will not be listed on your estimate. You will have one to four types of options actually listed:

    1.  You will have one or more options to pay a lifetime income to you only (lifetime annuity)

    2.  If you have a spouse, you will have the option to take lesser benefits for the duration of both of your lives (life & survivor annuity).      
         Choices may include reduced benefits for your spouse.

    3.  You may have a lump sum option as an alternative to a lifetime income (which may qualify for an IRA rollover) or

    4.  You may have an option for a pension that only pays for a limited amount of years

    You have more options than are listed. For example, if you have the lump sum option available and you do not need to collect benefits immediately, you could avoid current taxation by letting guaranteed benefits grow in a fixed indexed annuity with 6% or more growth guaranteed for an income check later(see Guaranteed Growth and Lifetime Withdrawal Basics). If you never expect to really need income but want safe growth, you could roll the money into a fixed indexed annuity without any optional riders or fees.

    If you have a spouse, you definitely must take a look at what we call Pension Maximization. Instead of taking a lower pension option to give your spouse a benefit (#2 above), you take the higher pension option (life annuity) and purchase the right amount of life insurance (and the right types) to guarantee your spouse a similar or better income benefit than the life and survivor annuity. Depending upon the numbers and how inexpensive the life insurance is, this strategy can often allow you to give your spouse a comparable benefit while increasing your total monthly income. In addition, this strategy eliminates the risk you have if you take the life and survivor benefit and then outlive your spouse (if this happens you effectively have taken a lower check for the rest of your life in return for nothing). If you purchased life insurance, took the higher pension benefit, and you die first, your spouse would have enough life insurance proceeds to generate their own income check for life. If your spouse dies first, you can either drop your life insurance (further increasing your monthly income) or leave a death benefit to your family (possibly several hundred thousands of dollars). Most company pension options would usually leave non-spousal beneficiaries nothing. For more about this strategy, (see Life Insurance Replacing Spousal Pension.)

    Social Security Decisions

    Although age 62 is still the most popular age at which to claim Social Security, taking your benefits at 62 could be a huge mistake if you live long enough. If you were born before 1954, taking Social Security at age 62 reduces your check by 25% for the rest of your life (verses waiting to the full retirement age of 66). If you do live a long time, waiting to file may net you much more benefits over time. Every year you decide to wait after full retirement age to claim Social Security benefits, your check will be 8% higher. This means that if you wait until the maximum age of 70 to file versus filing at age 62, your benefits will be 76% higher on an inflation adjusted check for the duration of your life (and possibly your spouse's life). In the case of two spouses collecting Social Security, the surviving spouse loses the smaller of the two checks. For married couples, Social Security income planning puts a large emphasis on delaying the larger of the two checks. Some strategies that are employed today include:

     Those waiting to claim benefits may purchase term life insurance (see Term vs. Permanent) to insure against the risk of dying before they collect.

     Retiring before 70 but using retirement money to supplement income while waiting to file for higher Social Security benefits later.

    √ Filing at 66 while continuing to work and saving the money collected from Social Security benefits for later. Many do this and by defer income through contributions to IRAs or 401(k) or Guaranteed Growth Lifetime annuities.

    √ File and suspend. This allows the primary earner to delay and grow his benefits a guaranteed 8% per year while the lower-earning spouse collects every month. One spouse can file for their benefit (which makes the other spouse eligible for their spousal benefit), and then immediately request that their benefit be suspended. The spouse suspending benefits requests to receive no checks, and that triggers the 8% growth per year. Then years later he or she can draw Social Security benefits. This increases the higher check, which ultimately increases survivor spouse benefits.

    √ Filing a restricted application. This strategy allows the one earner who is at full retirement age to file and collect a spousal benefit (half of the spouse's benefit) while delaying their own benefit for 8% growth of their own check. Later the filer switches from the spousal benefit to their own now higher benefit.

    Many factors are considered in maximizing benefits, including health and the ages of each spouse. We have access to a Social Security Maximization calculator to help give you guidance. (See Social Security Maximization on our Website.)

    Click here to learn more about maximizing your own pension and Social Security Decisions.

  • Retirement Risk #7-Not preparing for the possibility that either spouse could need long term care (the big X factor).

  • Most responsible retirees have auto insurance, homeowners insurance, Medicare, and some sort of insurance to help pay what Medicare does not cover (see Medicare Supplemental). However, many retirees neglect to prepare for potential long term care needs. This could be financially catastrophic and is very likely to occur. Consider these statistics:

    1.  70% of those over 65 will need some sort of long term care

    2.  20% of us will need it for over 5 years.

    3.  The average female will need it for 3.7 years while the average male will need it for 2.2 years. ******

    Many nursing homes cost over $200 per day today and costs are rising. One spouse needing care could drain down most retirement savings quickly.

    Unfortunately, Medicare is not designed to pay for long term care. Medicare pays for up to 20 days in a skilled nursing home, and some Medicare supplements coordinate with Medicare to pay up to 100 days. Medicare does not cover custodial home care or assisted living retirement.

    Some try to depend on family, but this can create a huge burden on family members. Often family members planning to care for loved ones find out that doing so is impossible.

    Others try to save to pay for their own care. This is very risky planning. Who knows how much money you will need to save or for how long. Plus, if you have a spouse, they may need to use the savings leaving you unprotected.

    Ignoring this financial risk leaves a huge void in your retirement plan. You may have everything else in order, but huge long term care expenses can drastically increase your need for INCOME.

    There are several basic ways to plan against this risk. You can

    1.  Purchase a long term or short term care policy. These policies give you income when you or your spouse need long term care. Long Term Care Insurance does not have to be expensive as benefits are customizable. Policies can be customized to fill in an income gap for a few years if you needed long term care. Since most claims are less than four years in duration (and many are less than one year), a policy where income benefits would last for one to four years of care would help drastically reduce the chances of serious asset reduction due to negative income flows caused by long term care expenses(see Traditional Long Term Care Insurance).

    2.  Leverage assets through life insurance. Some new life insurance policies today allow you to access a portion of death benefits before you die for long term care expenses. Some policies offer cash value accumulation as well. Benefits can be purchased with a monthly premium or with lump sum cash that might already be set aside for long term care. Death benefits not used for long term care can be passed to beneficiaries. (See Alternatives to Long Term Care.)

    3.  Leverage assets through income for annuities. Some annuities increase your guaranteed income for life if you had a long term care need. If you are needing guaranteed income anyway, these policies may offer a great benefit as some of them double the monthly income benefit for several years if you need long term care (see Multiple Benefits in One Product). Often, these benefits are built into policy riders for a very small cost with little orNO UNDERWRITING! This means that someone who otherwise might not qualify for long term care or life benefits due to health could possibly qualify for some level of protection.

    Of course, you could utilize a combination of the strategies above to build a financial defense against long term care costs. However you do it, it is extremely important that you do not ignore this risk! About half of the people in nursing homes are on Medicaid (welfare). Many of these people saved all of their lives but never thought that long term care would bankrupt them.

    Important note: If you already have a spouse who has a health condition which will likely cause them to need long term care in the future: Be sure to check out the benefits of income annuities with NO UNDERWRITING that double the income for a facility. Annuities can also be very important planning vehicles in protecting income streams for the surviving spouse of a spouse needing long term care.

    Click here to learn exactly how you could insure or leverage assets to protect against the devastation of a long term care situation.

    Summary

    Are you confident beyond a shadow of a doubt that your income stream in retirement will afford you the luxury of fulfilling your retirement dreams (even if your health fails, your cost of living rises, you live longer than expected, or your investments do not perform as expected)?
    If you are less than sure about your future income, act quickly to make sure that you avoid the 7 mistakes that can kill your retirement income. During retirement, income is the life blood of financial security.

    Click here to let the experts at Future Benefits find solutions to fit your specific financial situation.

    *Source: New York Times 06/09/2013
    **Source: www.vanguard.com Plan for a long retirement
    ***Source: Time.com 02/11/2013
    ****This information is for broad information purposes only. Each annuity works differently depending on the exact contract features.
          See exact contract for specifics.
    *****Source: www.Inflationdata.com  
    ******Source: www.ltcfeds.com (2009)