3 Thoughts Before the Holidays

Today we honor we honor many – the men and women who made the ultimate sacrifice on the decks and fields of Oahu, and those who served in the Pacific and European Theaters of WWII. That Day of Infamy ignited a period of suffering, death and destruction, as all wars bring; and ended with the first and hopefully only time that atomic weapons were deployed. Yet, how many teachers, scientists, doctors, artists, and the like, both Japanese and American – great women and men who created great works or have impacted positive change for others – are on this Earth because their fathers avoided an inevitable and devastating land invasion of Japan triggered by the surprise attack on Pearl Harbor seventy-three years ago?

Money is a tool that can bring security, freedom, and opportunities in our lives. It can help preserve and protect life. It can change lives. I’ll share some reflections that hopefully give you some ideas for the many seasons ahead, and waken the sleeping giant inside you.

Trends in Retirement Plans – I’ll share some thoughts expressed from a panel discussion of three retirement industry executives, and my insights.

Challenges
• Defined contribution plans (e.g. 401k’s) evolved to supplement defined benefit plans (pension plans) and Social Security. Furthermore, the amount you can contribute annually is limited by the IRS, and each year those limits are subject to increase, maybe. For 2015, the limit for 401k contributions increased by $500 or $1,000 (depending if you’re 50 or over), SIMPLE’s up by $500, but IRAs are unchanged.
• Income from retirement plans may be limited due to insufficient contributions, poor investor behavior or investment performance, or the type of retirement plan, if any, offered by your employer.
• These emphasize the need to control the things we can control. It’s about being a model for good investor behavior, and investing the time to develop multiple sources of retirement income, including after-tax investments, business or real estate income, and retirement accounts. And perhaps you need to defer the retirement party, or work part-time in retirement.

Some Solutions
• Ok, you’re “In” unless you “Opt Out” – More employer plans offer automatic enrollment and/or investment option defaults to help increase participation – to help overcome “I’ll do it later” or confusion. And other plans nudge you to up your contribution rate, say in increments of 1% annually, until you hit 10%. These help “force” you to save for the future.
• Play with the big kids – Some investors are fully capable of DIY investing. However, others may benefit from a little help. So retirement plans offer a combination of DIY investing (menu of fund options), and institutional management services (e.g. target date funds, allocation funds, and customized portfolios). Target date funds (TDF) get a lot of attention (e.g. may be a default investment option), and may be appropriate for the average participant or casual investor. However, all TDFs are not created equal. They come in all shapes and sizes, and there are about three dozen TDF fund providers.
• Income guarantees – Drivers tend to put the foot on the brakes when road conditions become dicey. Similar behavior occurs as we near retirement age. We don’t have time to earn it again, can ill-afford to make a “big mistake,” and market calamities scare the bejesus out of us. People like “sure things” and converting a mountain of retirement assets into a steady retirement paycheck is nirvana. However, the problems with “guaranteed income” are two-fold. First, the retirement plan industry isn’t quite there for 401k’s. Second, annuities may provide an alternative solution. However, caveat emptor. Be careful of the annuity mumbo jumbo. Ask about the guarantees for inflation-protected income in retirement. Remember the eternal risk/return tradeoff. ImmediateAnnuities.com says you should plan on a 2% to 5% return with a hybrid or equity-indexed annuity, or an immediate annuity. So if your lifestyle plan requires a higher return or flexibility, consider annuities for a portion, and seek caring and professional help for the rest.

When to Take Social Security
Benefit calculations are complicated by covered earnings, age, and post-retirement earnings. And there are numerous options when to start benefits. One rule of thumb is to defer filing to age 70 for maximum benefits. However, Wei-Yin Hu, a researcher at Financial Engines estimates there are over 8,000 ways a couple can file for retirement benefits. Check your projected benefits at SocialSecurity.gov. And check the calculators at Blackrock.com and FinancialEngines.com. I ran a hypothetical on myself assuming my wife and I elected to start drawing at full retirement age 66. Their calculator suggested we’d increase our lifetime benefits by about 12% if my wife filed for earned benefits at 66, I file for spousal benefits at 66 (with restricted application to exclude earned benefits), then at age 70, I file for earned benefits and she files for spousal benefits. The calculator makes numerous assumptions including the exclusion of widowed or disabled benefits, “start and suspend” options, and inflation. Nevertheless it’s interesting to consider options, and suggests one should get help in thinking this one through.
 

“They want you to say Grace… The blessing!”
The year’s end can be chaotic – tying up loose business ends, managing for travel and “time off” schedules, and boxing the packages to meet Steve the mail guy’s shipping deadlines. However, the conversation between Aunt Bethany and Uncle Lewis warms me with the holiday spirit. It’s a time for friends and family, caring for those in need, and to smile. May you have health, prosperity and strength. Thank you.

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