Securing a Retirement Income for Life Strategies for Managing, Protecting and Preserving Your Wealth Second Edition
Bill Griffith, Jr., CFP速
W.E. Griffith Publications Washington, PA
Copyright © 2006, 2009 William E. Griffith, Jr., CFP All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of the publisher. Published by W.E. Griffith Publications Cover Design by Pamela M. Griffith
International Standard Book Number (ISBN) 978-0-9785506-0-8
This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that neither the author nor the publisher is engaged in rendering legal, accounting, or other professional service. If legal advice or other professional assistance is required, the services of a competent professional person should be sought.
-From a declaration of Principles jointly adopted by a Committee of the American Bar Association and a Committee of Publishers.
This book is intended to provide general information regarding appropriate retirement and estate planning actions based on the tax rules and other applicable laws in effect at the time of this writing, which are subject to change due to IRS and Congressional policy moves. It is not intended to be a substitute for the advice of a qualified practitioner. The author and publisher shall have neither liability nor responsibility to any person or entity with respect to any loss or damage caused, or alleged to be caused, directly or indirectly by the information contained in this publication. Printed in the United States of America 2nd Edition The CFP certification mark is owned by the Certified Financial Planner Board of Standards, Inc. S&P 500® is a registered trademark of The McGraw-Hill Companies, Inc. This book is available at a special quantity discount to use as a premium or for educational purposes. For more information, please call 724.228.3440 or write to W.E. Griffith Publications, 1150 Washington Road, Suite 200, Washington, PA 15301.
This book is dedicated to my family for giving me all the time it took to write – time that really belonged to them.
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Contents Preface
VII
CHAPTER ONE Planning a Retirement Income for Life
1
CHAPTER TWO A Better Path to Financial Independence
15
CHAPTER THREE Risks in Retirement
37
CHAPTER FOUR Critical Issues in Retirement Income Planning
45
CHAPTER FIVE Income Planning
63
CHAPTER SIX Strategies for a Changing Lifestyle
73
CHAPTER SEVEN Income Distribution: Making Your Retirement Income Last for Life 109 V
Contents
CHAPTER EIGHT Addressing Healthcare Risks
127
CHAPTER NINE Wealth Preservation
147
CHAPTER TEN Choosing a Financial Advisor Appendices Index
VI
195
187
177
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Preface
A
new day is dawning. A new retirement is on the horizon. Significant changes over the years will have profound implications on the retirement planning process. To address these changes, planning and preparation will require more complex, innovative and “dynamic strategies” to meet these challenges head on. Although there are many things about the future that we know, much remains unknown. For instance, we know that the number of retirees is set to double over the next 30 years according to the U.S. Census Bureau. In 2008, the leading edge of the “so called” baby boom generation – those born between 1946 and 1964 – will turn 62.1 Overall, this is an enormous generation of some 78 million Americans. This represents approximately 26 percent of the U.S. population (projected January 1, 2006).2 For those who make up this generation, what type of retirement can they expect to have? A survey by the Certified Financial Planner Board of Standards, Inc. shows that 42 percent of highincome consumers fret about financial decisions and are not confident in their ability to control their financial future.3 Assumptions about the future are a crucial part of the retirement planning process. The investment needed to finance retirement depends on an accurate forecast of expenditures and rate of return assumptions well into the future. The uncertainty of traditional return assumptions is a significant risk in retirement, which can have a tremendous impact on retirement security. Fewer retirees in the future can expect to receive a steady stream of income from employer provided defined benefit plans. This suggests that individuals will have to rely more on their own resources for a much higher percentage of their retirement income.
VII
Preface
Surveys show that people are uncertain over whether Social Security will be there for them in the future. In 1945, there were 42 active workers for each retiree. Today, there are only three (3.3) workers for each retiree and this number is expected to fall to two (2.1) workers by 2031.4 Even though Americans are unsure about the future of Social Security, the percentage of all workers who regularly save for retirement has dropped to 42%, the lowest rate since 1980.5 This book will provide answers to questions about: •
How much you will need to accumulate to provide a retirement income.
•
What to do and how to go about planning to meet your retirement needs and objectives.
•
How best to prepare for uncertainties in a world where the future is unknown.
•
How long you can expect to live in retirement.
•
How to implement the very best strategies for managing, protecting and preserving your wealth.
Retirement life in the future will be much different than in the past. For one thing, life in retirement will be much longer. For many people, retirement may represent the longest stage of their life. It is a time when they can look forward to a whole new range of exciting challenges and activities – to experience their own vision – with the same passion, excitement and sense of accomplishment they had during the first part of their life. Along with a much longer life, however, comes more complex and probably much more expensive financial challenges. This book will help you prepare for the many challenges and uncertainties that lie ahead as you approach retirement and during your retirement years. VIII
Preface
In response to the changing paradigm surrounding the risks of funding future financial obligations, individuals have been forced to shoulder more of the financial burden. The shift away from defined benefit plans to defined contribution plans is a trend that has revolutionized retirement planning by placing more of the responsibility for saving on the individual. In 2005, 42% of all workers participated in defined contribution plans for pension coverage, up from 36% in 1999. In 2005, 21% of employees were in defined benefit plans.6 Now more than ever, people are faced with having to make serious decisions about how to manage their company retirement plan, how much to contribute, how to invest their money and what to do with their vested balance after they retire. They need to have a plan based on clear and accurate information to help them make decisions about when to retire, how long they can expect to live in retirement and how much they need to accumulate. Retirement planning isn’t easy and the reality of successful investing is that it is a complicated and time-consuming process. Statistics show that 74% of people nearing retirement would prefer to consult with a professional financial advisor for reliable advice on retirement planning decisions.7 The increasing number of people seeking financial advice to help them plan for retirement suggests that they are serious about achieving their goal. In fact, studies examining the retirement savings of baby boomers show that obtaining more education and guidance, like that provided in this book, are important factors contributing to larger amounts saved for retirement. A qualified professional can assist with the calculation of the accumulations needed to provide an income over an expected retirement lifetime. Through further analysis, a planner can determine the amount of additional money, if any, one would need to save through personal investments to reach that amount. Meeting financial obligations through an investment-based approach, however, is only part of the process. Decisions about when to retire, how long you can expect to live in retirement and how much you need to accumulate are complicated by an ever changing set of circumstances. Throughout this book, I emphasize a process-driven approach for facing many of these and other critical issues in retirement. The IX
Preface
interactive nature of this book will enable you to set more realistic goals based on accurate forecasts of cost and return assumptions in the future and protect against the risk of funding long-term liabilities by sharing the risk of financial burdens. In light of the anticipated challenges in retirement, a more acceptable approach is to use a combination of methods designed to increase the likelihood of achieving your goal of financial freedom.
References 1
U.S. Census Bureau. Authors calculations based on U.S. Census Bureau projections for 2006. 3 Certified Financial Planner Board of Standards, Inc. Consumer Survey. 4 Social Security Administration. 5 Roper ASW. 6 U.S. Department of Labor; Bureau of Labor Statistics. 7 ING – Business Journal; Baby Boomers Not Getting the Retirement Message. 2
X
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Index
Activities of daily living, 128-129,134 Advanced wealth preservation strategies, 17,26,29,168-169,174 After-tax return, 65,88-89,92,98-99 A.M. Best, 134 American Association for Long-term Care Insurance (AALTCI), 133 Annuities commercial, 113-120,166-167 fixed, 106,114 fixed-index, 105-107,124-125 immediate, 115,117-120 qualified, 155 Asset allocation diversified, 45,77-78,124 strategic, 47-48,58,60,82,93,181 tactical, 47-48,58,60,82,93,181 what is, 45 Asset base, 17,32,135 Asset class, 38,45,58-59,77-85,113-114 Asset protection, 26,32-34,124,164 Assets non-retirement, 26 retirement, 19,26,157-164,173 Average annual expenditures, 52-54 Average rate of return, 38 Balance sheet, 20,130-131,142,148-149 161 Basis planning, 169 Bear market, 38,84,120,122 Beneficiary contingent, 21,24,27,30,152,160-162
designation, 151-152,160-166,174 of IRA, 152 primary, 150,160,162 spendthrift, 165 Bonds short, intermediate and long-term duration, 46 Budget worksheet, 17,50,52 Bypass trust, 149,161-162 Capital gains tax, 145,149,167,169-171 Capital market, 38,56,109 Carryover basis, 169-170 Cash surrender value, 143 CERTIFIED FINANCIAL PLANNER™, 145,160,174,177,182,183 Certified Financial Planner Board of Standards, Inc., 178,180,186 Code of Ethics, 179 Company pension plans, 40,113 defined benefit (DB), 39,41 defined contribution (DC) 39,41 profit sharing, 27 Company risk, 22-23,25,29 Compensation commissions, 59,184 fees, 59,184 methods of, 184 Compounding power of, 80-81 Comprehensive Retirement Security & Pension Reform Act of 2001, 165 Comprehensive risk management, 20 195
Index
Consumer Expenditures Survey, 53-54 Consumer Price Index (CPI), 25,49 Cost of Living Adjustment (COLA) Rider, 134 Defined benefit (DB) plans, 39,41 Defined contribution (DC) plans, 39,41 Diversification, 38,45,59,77-80,108 time, 59 Diversified asset allocation, 45,76-77,124 Diversified portfolio, 22,25,29,48,78,85, 108,114 Duff & Phelps, 134 Durable power of attorney for assets, 28,30 for healthcare, 28, 30 Duration, 46,55-56 Economic Growth and Tax Relief Act of 2001, 149,169 Early withdrawal penalty, 155 Efficient frontier, 79 Efficient Market Hypothesis, EMH, 56 Eligible rollover distribution, 29, 154 Elimination period, 134 Employee Benefit Research Institute, 6 Estate planning, 20-32,149-151,160,174 shrinkage, 142 tax, 26,29-34,142-151,161-174 tax balance sheet, 148-149,161 tax repeal, 29,148-149,169-170 transfer cost, 148,161,169,174 Exclusion amount, 29,148,163,169 Exemption amount, 149,162,169 Fama/French research, 57 Family limited partnership, 33-34 Federal estate tax, 26,163,172-173 Federal estate tax equivalent exemption, 26,172-173 Financial analysis, 17-18,61,177 freedom, 1-2,10,13,85,185 independence, 2,6,13,19,85 196
planning process, 51,69,178,180,183 position,17,74 Financial Planning Association (FPA), 182-183 Financial Planning Practice Standards, 180 Fixed income, 22,25-30,59,65,71,86-87, 114-120,167 FORTUNE 500, 39 Future value factor, 66,68 General partners (see Family limited partnership, 33-34 Gift tax, 148-149,168,171 Harvard University, 39 Health Insurance Portability & Accountability Act of 1996, 146 Healthcare directive (see Durable power of attorney for healthcare) 28,30 Hewitt Associates, 39 Income distribution,15-20,50,63,93,99,107,167 statement, 20-21,24,27,30 Income tax marginal rate 26,155 marginal tax bracket, 21,24,27,30 Individual retirement trust, 164 Inflation-adjusted income, 111-112 Inflation rate,49-52,63-69,110-111,120 Insurance long-term care 28,30,129-144 life, 144-145,158-172,182 Investable resources, 48,74,93 Investment advisor, 181-182 Investment policy statement (IPS), 181,183 Investment proposal, 181,183 IRA traditional, 152,156-157,159 Roth, 159-160 Joint life expectancy, 22,29,153 Legacy, 175 Liability risks, 26,32,34,124
Index
Life Cycle accumulation phase 15-16,20,49,55, 61-63,93,172 income distribution phase 15-16,20, 50,63-64,93,99,107,112,167 preservation phase, 16,20,49,55,61,65, 70,86,93,99,107,112,167 protection phase, 16,20,49,55,61, Life expectancy, 22,29,43,110-111,143 145,152-154,165-166 Life settlement, 143-145 Limited liability company, 33-34 Limited partners, (see Family limited partnership, 33-34 Living trust, 160-161,174 flexibility of, 162 Longevity 4,127,168 management, 113,166 risk, 38-43,106-113,120,125,166-167 Long-term care assisted living facilities,129 average cost of, 127 healthcare, 127 home health care,127,129 insurance, 128-132 Lump-sum distribution, 165 Marginal rate, 26, 157 Marginal tax bracket, 21,24,27,30 Market risk, 37-38,43,45,106-109,113, 120,124-125 Market timing, 46,57,83 Modified adjusted gross income, 156 Money managers, 59,181 individual, 181 professional, 59 Money market fund, 21,24,27 Money market mutual funds, 21,27,59 Multidisciplinary approach, 19-20,34,43 Non-retirement assets, 26 Nursing home, 53,127-136 average length of stay in a, 127 Personal savings rate, 41
Pour-over will, 28,30 Portfolio liquidation, 109,113,120 optimization, 58 performance, 6,58,83 policy, 6 Present value factor, 67,69 Probate, 164 Profit sharing plan, 27 Purchasing power risk, 50 Qualified annuity, 155 Qualified retirement plans, 26, 152 Quarterly Performance Review, 73 Qualified Plan Analysis, 159 Rate of return after-tax, 66 average, 38 nominal, 86 portfolio, 110 real, 86 target, 29,46,63-71,87-91,96,100 Real estate investment trusts, (REIT’s), 46, 75,77 Real rate of return, 86 Rebalancing, 58,82 Required beginning date, 152 Required minimum distribution, 152-159 Retirement accumulations, 5,74,107 income goal 2-8,17,61-64,68-71,93-99 planning process, 6,42,127 paycheck, 177 risks in, 8,43,54 savings, 103 Retirement Readiness & Middle America Survey, 177 Return, (see Rate of return) Risk-adjusted, 55 Revocable living trust, 28,30 Risk in retirement, 8,43,54 liability, 26,32,122 longevity, 37-43,109,113,120-125, 166-167 197
Index
of not saving enough, 37-43,106-107 profile, 6,22,25,29,46-48,55 purchasing power, 50 tolerance for, 6,21,46-48,55 tolerance questionnaire, 44 tolerance, 3,28,30,59,75-76,84,180 return profile, 47,75,79,93,114 Rollover distribution, 29,154 Rollover IRA, 155,157 Roth IRA, 30-31,156-160 S&P 500速, 27,83,106,124 Sharpe ratio, 55 Social Security, 39-41,99,113,157 full-benefit retirement age, 40 Standard & Poors, 134 Standard deviation, 38,55 Step-up income tax basis, 149,169-171 Stocks domestic, 46 foreign, 45 growth, 57 large capitalization, 46 small capitalization, 46 value, 57 Stretch provisions, 154 Structured installment sale, 166-169 Target rate of return, 29,46,63-71,87-96 100,116,138 Tax basis, 21,24,28,30,149,169-172 Tax estate, 26,29-34,142-151,161-174 federal estate, 26,29,163,172-173 gift, 148,149,168,171 income, 26-31,145-149,151-174 transfer, 28,31,147,167-169,173 Tax deferred compounding, 155 Time horizon, 46-48,59,180 Transfer tax, 28,31,147,167-169,173 Trust bypass, 149,161,162 credit shelter, 28,30,149,161,162 domestic, 33,45-46,49
198
family, 149,161,162 insurance, 173 offshore, 33 residuary, 149,161,162 revocable living, 28,30 see through, 165-166 Two-share estate plan, 149,161 Unified credit, 148,149,161,174 Uniform distribution table, 152-153 University of Pennsylvania, 39 Wharton School of, 39 U.S. Bureau of Labor Statistics, 52 U.S. Commerce Department,, 41 U.S. Department of Health & Human Services, 99 Viatical settlement, 143 Volatility, 38,45,47,60,77,80 Wealth manager, 59,182 Withdrawal rate, 25,110-112,117,120 Worksheet budget, 17,50,52 estate tax, 161 financial analysis, 17,18 retirement accumulations, 5,74,107
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Notes
199
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