I’ve written in this retirement blog several times recently that America is entering economic stagflation. When the economy goes into a slump (stagnation) but prices rise faster than normal (inflation), that’s stagflation. We’re there! Stagflation is much worse than a mere recession because inflation is robbing you of purchasing power at the very time your income is dropping. The latest unemployment rate jumped to 5.5% from 5.0%, the highest level since 1985, and the consensus forecast is for higher joblessness. If you’ve visited the grocery store or gas pump recently, you’re an expert on inflation. The only important question remaining is “how much” and “how long” will the markets react to the new economic climate, and how will your retirement be affected? Have you thought about the consequences?

The problems in housing are not improving as the government pundits and Federal Reserve were forecasting. In fact, foreclosures are now over a million and continue rising, housing-related jobs are disappearing rapidly, and all businesses connected to housing (plumbing, appliances, carpet, lumber, lighting, etc.) have skidded to a halt. The investment banks of Wall Street are searching for new capital to stay afloat as are several name-brand banks: all because of the meltdown in housing. The housing problems will deepen, plus more credit card, auto and boat loans will soar as higher prices and fewer jobs take their toll. Markets will react negatively.

The stimulus package designed to bail out the economy will have a short-lived and anemic effect. In fact, inflation has already eaten away the extra cash most families will receive. Nothing short of massive new money infusion will move economic activity higher. But, more money circulating in a depressed economy only heightens inflationary pressures. The Federal Reserve sits on the horns of a dilemma: lower interest rates are needed to boost economic activity, but lower rates will further weaken the dollar and boost import prices. Higher priced imports allow American firms to raise their prices without fear of losing business. Of course, the biggest import of all - oil - has forced up prices of everything. Get ready for even higher energy prices because while U.S. demand is falling, it is rising rapidly in China, Asia and the Middle East. No amount of political rhetoric and finger pointing will provide a short-term solution. Higher energy prices are here to stay and no amount of jaw-boning will change this fact.

All these “symptoms” cause a highly volatile stock market. And, if you’re like most Americans, your retirement money is in mutual funds in the market. Far too many who can ill afford to take risk have been assured that “in the long term” the market will give them above-average returns. The assurances of Wall Street beg the question: does a retiree have a “long term”? In a market meltdown like 2000-02, many prospective retirees will have to delay or scale-down retirement.

If you’re unable to “handle the worse case outcome,” you might want to consider heading for safer harbors. The consensus is that market volatility will continue in the face of geopolitical unrest, inflation will persist, the weak dollar continue, taxes will rise and economic growth will remain under nourished. Your best strategy is to meet soon with your safe money advisor to shelter you from the winds of an ill economy. Timing is everything in uncertainty - so if you can’t afford the risk; do not procrastinate, because the situation could worsen.

>> Get all your options and learn more by going to the retirement video library >>

Shelby J. Smith, Ph.D.
June 2008

Have you studied your 401(k) statement for the most recent calendar quarter (2008:1Q)? If so, you’ve noticed a loss of about 8% - 10% if you’re average. As you know, and as I mentioned in this retirement blog, your 401(k) money is generally invested in mutual funds and mutual funds are composed of stocks and bonds. Since stock prices have been violently, and predictably, waxing and waning in recent months, so has the value of your 401(k) account. The same is true with bonds except the drivers are not only the economy but also interest rates and the creditworthiness of the issuing company. During 2008:1Q the markets were mostly down and so were your 401(k) assets. Not to worry, you say, because this is your retirement money and there is lots of time to recover from market downturns. True, unless you’re in the red zone right before retirement (say age 57 or more). Did you know that in the last major market meltdown (2000-02) the S&P index, a major barometer of the stock market, dropped 50% of it value. Those in retirement’s “red zone” were victimized with huge losses and the results were: postpone retirement or scale down the planned retirement. What can you do to protect your 401(k) assets if you’re scared stiff that a major market downturn will ruin your retirement?

The Employee Retirement Income Security Act of 1974 (”ERISA”) and the IRS allow you to transfer some or all of your money out of your 401(k) without stopping work, without retiring and without ending your participation in your employer’s 401(k) plan. However, your employer has the right to prevent you from transferring, or load with qualifications and restrictions, what ERISA and the IRS permit. To allow such transfers your employer must add an amendment to the plan which allows in-service, non-hardship withdrawals (”INNHW”). This provision can be straightforward with few restrictions or it can be very restrictive — your employer gets to decide. Most large companies have added the amendment because recent court cases, and the bankruptcy of Enron which also resulted in massive losses of their employees 401(k) assets, have opened a Pandora’s box about the fiduciary responsibility of employers to do all they can to help employees protect their retirement money in plans they sponsor. Below is what the INNHW amendment, in it most liberal form, will allow and still permit the employee to still work and continue contributing to the 401(k) plan.

An employer profit sharing and matching contributions, plus any money the employee transferred to the plan from another qualified pension plan, and the earnings on such money, can be transferred into a self-directed IRA and neither ERISA or the IRS impose an age restriction. However, the employer has the right to stipulate that only “vested” amount may be transferred and they can also set a minimum age that an employee must reach before transfers can occur. They can also add other restrictions like: (a) a minimum number of years employed; (b) limit the percentage that can be transferred; (c) cease or reduce matching contribution for a specified period following a transfer; (d) limit or prevent participation in the plan for a given period of time. In fact, the employer can add almost any restriction they want provided the uniformly apply it across all employees. The INNHW amendment applies to all employees, including owners, partners and senior management.

ERISA and the IRS allow the employee contributions to be transferred without penalty and without taxes being paid once the employee reach age 591/2 years of age. Again, the employer can impose limitations and restrictions on such transfers in the ISNHW amendment. Why would anyone want to transfer their retirement money from their 401(k) to a self-directed IRA?

The major benefit of in-service, non-hardship transfers by plan participants is the opportunity to protect their retirement money from the vagaries of the market, reduce unsuitable risk, take advantage of anticipated changes in tax rates, and convert moneys to a Roth IRA during the income suspension window in 2010. If a participant is currently near retirement, they may have insufficient time to recover from market downturns or bolster their savings rate to make up losses. The resulting stress could easily affect their job efficiency.

It is a foregone conclusion that the marginal tax brackets and capital gains taxes will increase when the deficit reduction tax breaks of the Bush Administration expire in 2010 and 2011. By re-positioning qualified retirement money now, it should be possible to manage favorably the tax liabilities associated with retirement money in employer plans. The higher-income participants have the added advantage of converting all or some of their qualified retirement assets to a Roth IRA in 2010. The tax relief is likely to be a short-lived window of opportunity. By transferring moneys from employer plans to self-directed IRAs, participants have virtually unlimited investment options: domestic and foreign stocks, bonds and general securities, bank CDs and other insured accounts, annuities, real estate, commodities, business interests, limited partnerships and more. Once the retirement money is moved outside the plan, professional money managers can be used to meet specific and individual investment objectives. The investment options inside most plans are simply not sufficient to address the variability of assets from lowest paid employee to business owner. Plus, the typical plan participant receives very little advice on which plan options to select and how much to allocate to each. Money in an IRA at the participant’s death can be added directly to the spouse’s IRA or “stretched” by a beneficiary over their remaining lifetime. Unless the employer’s plan allows for spousal and beneficiary transfers at death, the lump-sum pay out could result in substantial taxes for the beneficiary. The “stretch” option with an IRA can be a great estate planning tool.

The management and administrative fees associated with employer plans can be onerous. By selecting no-load, indexed or other low load options once moneys are moved outside the plan, these fees can be substantially reduced. Since the typical fees charged employer plans approach two percent of total assets, the reduction to zero or a few basis points can make a significant difference in performance over a long period of time. If the employer is paying the fees, fewer assets in the plan means cost savings. There is a growing consensus that Social Security benefits should be postponed as long as possible to maximize lifetime benefits. Accordingly, early retirement may be financed more with plan assets and IRAs, and these should be positioned in place now to avoid the expected higher income taxes starting in 2011 and beyond. This is especially true of moneys destined for Roth IRAs. Making plan assets available for transfer to self-directed IRAs would be a decided morale booster for those in the red zone near retirement and also a stress reducer. Both of these benefits could translate into increased employee productivity. If a participant retires early, they can take distribution from a 401(k) plan at age 55 whereas IRAs permit penalty-free withdrawals only after age 59½. Accordingly, those planning to retire prior to age 59½ should carefully consider whether or not to remove employer profit sharing/matching funds and other eligible withdrawals pursuant to the in-service, non-hardship amendment. Of course, by using an IRC Sec. 72(t) election, IRA money can be taken at any age provided substantially equal payments are taken for the longer of five years or until age 59½ is reached. Some employer plans permit borrowing for a first home, educational expense, medical emergencies, and more; however, IRAs do not offer broad borrowing privileges. Thus, if money from a qualified plan will be needed prior to age 59½ and the employer’s plan allows borrowing, converting to an IRA should be carefully evaluated.

Special care should be exercised if a participant owns the employer’s stock inside the plan. There can be decided income tax advantages by moving the stock to a taxable account, paying ordinary income taxes on the original basis, and holding for the required time to qualify for capital gains taxes on the appreciation above the basis. It is strongly recommended that the advice of a financial advisor be sought if there is net unrealized appreciation of employer’s stock inside a pension plan.

Okay, how do you go about finding out if your employer’s 401(k) plan contains an ISNHW amendment? You can either asked the plan administrator (the Human Resources department can give you the name and/or the answer) or you can review the Summary Plan Document that you received when you started participating in the 401(k). Again, the Human Resources department can provide you copies of the Plan Summary. What if your plan does not have an ISNHW amendment?

Adding the amendment is a simple and costless process. Your employer need to instruct the plan administrator to add the amendment. Of course, the employer will have the option of adding restrictions and limitations…so you’ll want to lobby them to do the right thing. Be aware, and also warn your employer, that the plan administrator is paid fees based on the number of participates in the plan and the amount of money in the plan. So, expect them to object to the ISNHW amendment because as money is transferred their fees will decline. By the way, if you’d like to see how much the fees are on your plan — and also the actuarial rate of return — you can view the DOL Form 5500 which is filed annually by your employer by going to www.freeerisa.com. Just search by zip code and find your employer. This can be a real eye-opener.

Probably the best way to get your employer’s attention is to refer a financial advisor that specializes in ISNHW amendments to your employer. If you don’t know such an advisor, just visit www.theretirementpros.com and “ask the pros” to help you find one. We’ll be glad to make a recommendation. And while you’re at it, take a look at my most recent publication titled “Protecting Pension Plan Assets Against Taxes and Risk“.

www.theretirementpros.com
www.freeerisa.com
http://forums.kiplinger.com/showthread.php?t=2253
http://ezinearticles.com/?The-Hidden-Escape-Hatch-in-Your-401k&id=1124377
http://www.journal-topics.com/columns/thisway050824.html

America is facing troubling economic times: collapsing credit markets, advancing inflation, exploding energy costs, crumbling dollar, massive trade and budget deficits, wildly unstable stock market, diminutive interest rates and more. All indicators point toward a full-blown recession and trouble for those in or near retirement. It is time to circle the wagons and button down the economic hatches for the turbulent economic weather ahead.

If you have a 401(k) or other employer-sponsored retirement plan, chances are you own mutual funds or other investments that rise and fall with the market. Can you afford to lose some or all of your hard earned money if the market crashes? Is there a better place to shelter my money and still earn a good rate of return?

<<Updated>> If you missed Dr. Smith’s Video Webinar on “Recession Proof Your Retirement Money” you can go back to the Retirement Planning website and view recorded video >>

If you’ve read my book Guide to Social Security…and A Better Retirement you know that postponing Social Security until age 70 makes a great deal of sense for most healthy, married Americans that can do without the income. I mentioned this in my retirement blog in other posts. Of course, there are numerous exceptions and before postponing your benefits you should seek professional guidance. Obviously most haven’t because about two-thirds of current Social Security recipients started taking benefits before their normal retirement age? For the vast majority, this was a mistake and will cost them dearly in retirement as the result will be lower lifetime benefits. Is there a way to reverse this mistake and start again?

Yes! The Social Security Administration allows you to pay back the money you’ve received in Social Security benefits - without interest and without adjustment for inflation - and reapply for higher benefits. All you need to do is complete form 521, “Request for Withdrawal of Application”. You’ll be asked the reason for your action but don’t worry because any answer is acceptable. Let say you started at age 62 and have been drawing $1,000 a month for eights months but now want to reapply. Along with form 521 you’d write a check for $8,000 and then you can reapply when ready. If you filed a tax return during the period, you’ll probably want to file an amended return because chances are you overpaid your taxes and are due to refund. If you wait until age 70 to reapply, your benefits will grow about 8% annually, plus the cost-of-living-adjustments, which means your benefits will more than double from those at age 62. As you’ll learn from reading my Guide to Social Security there are several other good reasons to postpone Social Security if you can possibly afford to do so. In fact, the typical family may be able to add as much as $200,000 to their lifetime retirement income if the primary breadwinner postpones Social Security until age 70.

Let’s look at Fred and Sue, both aged 65. Both worked outside the home and are entitled to $1,500 each in Social Security benefits for the reminder of their lifetime. A quick glance at a Mortality Table shows that Sue is expected to outlive Fred by several years. The Social Security regulations says that one spouse is entitled to what they qualify for based on their own lifetime earnings record or 50% of what the higher earning spouse will receive, whichever is greater. Since Sue is expected to outlive Fred, wouldn’t it be nice if Fred postponed benefits until age 70 so that Sue would get a big raise in Social Security benefits if Fred dies first? Is there a way for Fred to get benefits based on Sue’s lifetime earnings record and then apply at age 70 for higher benefits based on his lifetime earnings record?

Due to a little-known glitch in the Social Security regulations, there is a way. Fred would apply for spousal benefits and receive 50%, or $750, based on Sue’s earnings. He would draw this amount, increased annually for cost of living adjustments, and at age 70 reapply based on his earnings. Presto, he will get substantially higher benefits for postponing and these, too, will be adjusted annually for inflation. At Fred’s death, Sue will be entitled to the greater of the two and her benefits will ratchet up to what Fred was receiving.

The foregoing shows two easy ways to maximize your Social Security benefits by taking advantage of little known glitches in the rules. More and more married couples are realizing that postponing Social Security is the wise move because there is an increasing probability that at least one of them will live well beyond age 90. Since Social Security is a lifetime annuity promised by the U.S. Government with benefits annually adjusted upward for inflation and tax-favored when taken, making them a relative larger part of your retirement income is smart. This is done by postponing until age 70 if possible and taking advantage of the two “loopholes” we’ve discussed. Of course, by using these loopholes you’re adding to the financial woes of the Social Security System. If you find these glitches attractive, act soon before Congress wakes up and closes the gate.

Shelby J. Smith, Ph.D.
April 2008

If you’re getting the same economic news I am, you’re probably nervous. You’re not worried about losing your job because that is something you used to do before you retired. But bad economic news also means retirement worries. To sidetrack a recession our government has printed a lot more money to bail out the bad boys, pay for imported oil and more, and spur demand for everything from apples to zucchini. More money is now chasing the same, or fewer, things to buy. The inflation rocket is set for launch. Rising prices means fixed retirement income will buy less and you’ll have to make adjustments. The double bogey is higher prices with lower interest earnings on your savings [looked at CD rates lately?]. Once the elections are over and your Congressperson is safe for another term, the triple bogey will be higher taxes across the board, including your Social Security benefits, to arrest a ballooning federal deficit. Not to add insult to injury, but if you happen to have your money exposed to risk - say in mutual funds, stocks, real estate, or anything else that waxes and wanes - you could be in for times-two double bogey if not a quadruple bypass. What can you do to recession proof your lifestyle?

Let’s start by dividing your retirement money into three categories:

(1) money you’ll need during the next five years;

(2) money you’ll need during years six through about years 15;

(3) money you’ll not need for at least 15 years.

Each category is special and “the time of planned use” will determine where to put the money. These categories can vary slightly between individuals and I recommend you get professional help from a financial advisor to help you determine what is right for you and your family.

The first category should be kept in “super safe and super liquid” places. The appropriate investments, or savings places, are: cash, money market accounts, bank CDs, money market mutual funds, savings accounts and high quality bonds that mature in less than five years. I know the rate of return will be depressing but if you take risk or invest in longer terms, you could lose part or all of your money. The price of the liquidity is the lower interest rate you’ll suffer. I know you want a higher rate of return along with low risk, but risk and reward travel together. By working with a financial advisor you can get the proper mix of this low-rate, super-safe investments. Your retirement income is now covered for five years.

Category two is the places you need some liquidity - just in case there is an emergency - and tax deferral would be nice also and you’ll want great safety. But, since market cycles can’t be counted on to be less than 10-12 years, we don’t want this category to be invested in investments whose value is determined by markets. At this point in history there are not many options in this category other than fixed and index-linked annuities. While you may not know anything about annuities now, you need to “get educated” by self-learning or working with a financial advisor who understands annuities. By the way, you’ll want to avoid advisors who don’t understand annuities because they’ll recommend against them. To tell the difference, you’ll need to help yourself get the basic knowledge about annuities by reading my “Is Your Annuity Good or Bad?”.

The last category is, unfortunately, where you currently have most of your retirement money: market investments like mutual funds, stocks, long-term bonds, REITs and other investments that Wall Street proclaims, in a very loud voice, that you should own. All these have one thing in common: risk. To offset this risk, you should be prepared to leave your money in these investments for a minimum of ten years and probably fifteen to be cautious. For example, as this is written the last peak in the market indexes (DJIA, S&Ps, etc.) adjusted for inflation was in 2000. We are coming up on ten years and the markets have not yet recovered from the dot.com bust of 2000-2002. How long will the sub-prime and mortgage bust keep the markets depressed? No one knows - they may say they do, but no one can see the future. While you still have some risk with this category, you odds are pretty good for your longer-term retirement money you’ll need fifteen year or more from now.

What was covered above is called an investment ladder for the retirement-minded. It is not sexy or risky, but it does position your money to last you for full retirement. Since each family’s circumstances are different, I strongly recommend that you engage the services of a financial advisor to help you craft a personalized retirement plan. Good luck.

Shelby J. Smith, Ph.D.
April 17, 2008

Do you think income taxes are going up or down in the next couple of years?  Judging from current presidential campaign rhetoric and the 2010 expiration of the tax reductions enacted between 2001 and 2005, taxes are undoubtedly headed higher.  Also, unless Congress acts the Roth IRA roll-over income rule will be relaxed in 2010 so that high income individuals can qualify.  Expected tax hikes, and the more liberal Roth IRA rule, means you should pay attention to your 401k [other qualified pension plans may also offer the same opportunities].  Let’s see how.

Let me introduce you to Leon, age 58.  Leon is his family’s primary bread winner and very concerned about where his retirement money is invested.  He learned a valuable lesson from the dot.com meltdown in 2000-2002 because a sizable portion of his family’s savings and 401k assets were lost.  It has taken the past six years to recovery from these losses and he’s especially concerned about what might happen in the current uncertain economic times.  He views the credit-energy-dollar problems as alarming and wants to move his 401k money out of harms way because he doesn’t have time to wait for a market recovery.  Also, he expects income taxes to rise and would like to use this to his advantage.  What can he do?

Leon’s employer has modified the company’s 401k plan to allow for in-service, non-hardship withdrawals.  This is a simply procedure implemented by the administrator that will allow Leon, and other employees, to take their employer’s contributions, and associated earnings, out of the company’s 401k plan and put them in an IRA.  Additionally, Leon and several of other employees in rolled over other qualified money into the employer’s 401k plan when they joined the company and these can also be moved to an IRA.  There will be no tax due or withheld from the rollover to an IRA if they do a direct trustee-to-trustee transfer.  Also, the 401k Plan, as modified, allows the employees to continue participating in the company’s 401k.  What are the advantages to Leon?

Several of Leon’s co-workers are moving to an IRA but a few have selected the Roth IRA.  Leon would like to put his 401k money in a Roth IRA but he makes more than $100,000 annually and this disqualifies him; however, in 2010 when this restriction is temporarily removed he will be able to roll his IRA into a Roth IRA without penalty.  If taxes go up as he expects at the end of 2010, he’ll pay the Roth IRA conversion taxes at the lower rate.  He’ll get an additional break because only one-half the associated income taxes are due in 2011 with the remainder paid in 2012.  Since he’ll have to leave the money in the Roth for five years following the conversion to avoid withdrawal penalties, he has decided to put the money in a seven-year bonus index-linked annuity.  There are two reasons for his selection.

First, he has moved his retirement money out of the way of another market meltdown and gotten a bonus to boot. Granted, the market may do fine but Leon can’t afford to take the risk that the market involves.  In seven years he plans to review his, and the economy’s, financial position and re-invest the money.  Unless things change, he’ll consider a bonus index-annuity at that time because the bonus will be tax free and he’ll be immune to market gyrations.  Second, he has “locked in” the gain from his 401k because he has no downside exposure if he holds the annuity until maturity.  The added advantage is that the Roth IRA grows tax-free and has zero tax liability, plus Roth income will not increase the taxes on his Social Security.  His Roth money can be used at any time after the fifth year following roll over.  If not used during his or his spouse’s lifetime, it can be passed forward tax-free to this children and grandchildren at his death.  The payments of principal and earnings taken during their lifetime will also be tax free.

At age 59½ Leon intends to take his employee contributions and earnings out of the 401k since the in-service, non-hardship provisions, and the IRS, allows him to do so without penalty and also continue participating in the company’s 401k.  He’ll decide at that time where he wants to put it and also whether or not another Roth IRA is suitable.  He can then be totally insulated from market losses that could easily ruin his retirement plans.

Leon, like a lot of 401k participants, is in the “red zone” right before retirement and as a practical matter cannot afford to suffer market losses.  Many small business people and professionals (doctors, lawyers, executives, etc.) are in the same position.  The investment selections inside their employer’s plan do not provide them the flexibility, selection or protection they need during this phase of their working years; thus, they opted to take control of their investments outside of an employer’s plan.  Additionally, they’re prepared to take advantage of the upcoming temporary changes in the Roth IRA qualifications and can pay all associated taxes before they increase.  Index-linked annuities are the perfect vehicle for the journey to this tax haven.  If you’re in a similar position, ask your employer about an in-service, non-hardship withdrawal from your 401k and then contact your financial advisor.

April 2008
Shelby J. Smith, Ph.D.

In this retirement blog we talk about retirement options that can help you get ready for Life’s Longest and Most Expensive Journey. You’ve reviewed your trip plans and recounted the money you’ll have to pay for your most expensive journey ever: retirement. You think you have enough money, but there could be trouble along the way. You’d feel better if you had a guaranteed lifetime income for you and your spouse. After all, your dad got a guaranteed pension for life from Mega Industries when he retired in 1972. Is there a way for you?

Most Americans have a guaranteed lifetime income: Social Security. The bad news is that this paltry pension will probably fall short of what you’ll need for the retirement lifestyle of your dreams. The good news is that it will be paid until you die. Plus, it has spousal benefits that could provide income to your loved one after you’re gone. If you’re already taking Social Security - and 50 million Americans are - you’ll get lifetime cost-of-living raises unless Congress eliminates them, which is not likely. Sadly, most current Social Security recipients started benefits before normal retirement age and will get lower benefits during their lifetime. Starting Social Security at the right time is a major retirement decision: to get it right, read my ‘Guide to Social Security… and A Better Retirement‘.

If you haven’t started your Social Security benefits yet, use SSA Gov. Calculators to estimate how much you’ll get. Let’s say you and your spouse will be entitled to $25,000 annually when you start. What’s more, you’ve estimated that $55,000 a year in today’s dollars will be needed for the lifestyle you’ve planned. Is there a way to “buy” this $30,000 shortfall so you’ll be assured - guaranteed - your yearly income in today’s dollars will always be $55,000 regardless of how long you live?

When facing a risk - in this case outliving your money - you turn to insurance. Insurance companies protect your home, car, life, health and more, so why not your retirement? They manage risk by spreading it across a large number of individuals. This allows them to accurately predict the probability of loss. For example, the odds of your house being totally destroyed by fire are 1 in 500 or being involved in a car crash are 1 in 82. The homeowners and drivers that have no claims subsidize those that do - the same principle works with guaranteeing you a lifetime income. If you live too long someone else will die too soon. Insurance companies know the odds and price their coverage accordingly. Buying insurance for longevity risk, or outliving your retirement money, is both cheap and easy.

Back to the $30,000 more in annual lifetime income you need to augment your Social Security benefits and maintain the $55,000 lifestyle you’ve planned! If you are age 65 and willing to deposit about $500,000 into an annuity, you can receive the $30,000 annually for as long as you or your spouse lives. The best part is that if you and your spouse die too soon, the balance in your account goes to your loved ones. Mortality tables show that for a couple aged 65, the median expected age that one of them will still be alive is 91. Of course, if one or both live beyond this ripe old age they will continue to get the $30,000 every year. The older you are when you lock-in the lifetime income, the less money it takes. The insurance company offers options about when to stop, start or store your income AND you will maintain control of your money in case you change your mind.

You’ll have more peace of mind knowing that regardless of what happens to the economy, your other investments, or how long you and your spouse live, you’ll have an adequate income for a good retirement lifestyle. Don’t move on this opportunity without shopping the market for the best annuity. The smartest way to do this is work with a financial advisor that specializes in annuities. If you want a guaranteed lifetime income, there is a way.

Shelby J. Smith, Ph.D.
April 2008

We discussed many topics in this Retirement Blog such as safe retirement investing, when to take social security, how to save on taxes…etc. One of the favorite places for retirement nest eggs is bank CDs. While this choice is rock solid safe and easy to access in case of an emergency, it may not be appropriate for all of your retirement money. Bank CDs are like chocolate – a good thing that can be overdone. In this month’s Internet video seminar we’ll discuss:

Far too many retirees just blindly put all their retirement money in short-term bank CDs without thinking about all the extra taxes they’ll be paying and the higher interest rates they can get elsewhere. Also, if bank rates are less than the rate of inflation – and that’s the case today – the longer your money stays in the bank the less it will buy. There are other safe alternatives that may be suitable for your retirement money, and you owe it to yourself and your loved ones to get as much return as possible without taking risks. The more income you have in retirement, the better you can live.

This Internet video seminar is free, educational and accessible on-line. You don’t have to leave home, can tune out anytime and remain anonymous while you learn more about your retirement alternatives. My objective in this free presentation is to help you and your loved ones make better retirement decisions. I sincerely hope you’ll register now and plan on joining in.

- Shelby Smith, Ph.D.

<<Update>> If you missed April’s Retirement Video Seminar online you may watch the re-broadcast on “When Bank CDs Make Sense” by going to the video library section of this website.

Many of you are in the red zone right before retirement, or you’ve already retired. No doubt your number one fear is running out of money in retirement. You’re part of a very large and growing demographic force: 35 million over age 65, 50 million drawing Social Security and 78 million baby boomers now turning 62. This means the future demand for everything used by the “retirement set” will increase, and “retirement prices” will rise dramatically. Many of you may have accumulated a retirement nest egg in a pension account, will draw a company pension and/or have other savings and investments earmarked for retirement. Where should you keep your retirement money?

If you’re keeping up with economic and financial developments, here’s what you’re seeing: sub-prime credit meltdown that has destroyed housing and is now spilling over into automobile debt and credit cards; highly volatile stock and bond markets; a weak dollar fueling higher prices for oil and other goods; more unemployment and rising inflation; retail sales, consumer confidence and new jobs creation in sharp decline; drastic interest rate cuts by the Federal Reserve to avoid a recession; a money giveaway stimulus package from Washington to prop up the lagging economy; widespread talk of recession and stagflation. These all add up to troubled economic times which should prompt you to review where you have your retirement money.

Learn about “safe” retirement planning today.  If you missed the video webcast on “Economic Outlook for Retirement Investing” you may watch the re-broadcast seminar by going to the Retirement Video Library Or by using this link >>

You can now buy insurance to protect you and your spouse against outliving your money. This coverage is for the retirement-minded whose biggest fear is living longer than their money. You simply deposit with an insurance company part or all of your retirement money, and they guarantee you, and your spouse, a lifetime annual income. Let’s see how this works.

Let’s assume you’re age 62 and retirement is heavy on your mind. You’ve been saving money during your working years, and let’s say you now have $500,000 to pay for your retirement years. You’ve determined that you’ll need at least $50,000 in guaranteed annual income when you retire at age 66. How could you arrange this lifetime guaranteed income now that will be ready for you in four years?

Let’s make this easy by assuming your only other source of income will be Social Security. By using the calculators at www.ssa.gov you’ve estimated your Social Security benefits will be $25,803 per year. You are interested in getting a guarantee from an insurance company to pay you the remaining $24,197, so you’ll have the $50,000 annually you have decided is adequate. The insurance company offers you a fixed index-linked annuity which guarantees that your money will grow by at least 7% annually until you turn it into an income (yes, there are annuities from top-quality insurance companies that will do this). The annuity you have chosen will also pay a 10% bonus when you open the account. Yes, such bonuses are available if you shop. At age 66, the annuity you have selected will guarantee you a lifetime annual income equal to 5.5% of the present amount in your account. Also, some annuities offer protection against inflation.

Since you’ll need $24,197 in four years, which will be 5.5% of your annuity’s account value, we know that $439,945 will be needed four years hence ($24,197 divided by 5.5%). This is where the math gets complicated, so call your financial advisor. If you invested $305,120 of your $500,000 retirement money with the insurance company today, and they credited you with a 10% bonus and guarantee that your account would grow by at least 7% annually over the next four years, you’d have the needed $439,945 when you retire at age 66. You and your spouse are now guaranteed to never run out of money during your lifetime, plus you have about $200,000 left, and growing, to cover emergencies.

But, what happens if you die too soon? The bad news is that your worries about money are over, but the good news is that your spouse continues getting the income if you chose the joint life option. If you chose the single life coverage, the remainder of your account value goes to your beneficiary. The account value is based on the market index to which your annuity is linked so that you avoid all market loses but participate in the gains. Additionally, you’re guaranteed a minimum rate of return by the insurance company even if the market loses every year. You’ve got upside opportunity without downside risk!

You’re set for life because the insurance company must pay you until you die, and Social Security is an entitlement for your lifetime. What’s more, you can start, stop and store the annuity income if your circumstances change (win the lottery or get an inheritance) AND there are no current taxes on the earnings until you actually start your income. You’ve covered your longevity risk without giving up control of your money. Your income is guaranteed for life, but you still have all your other options.

Are these policies fair to the policyholders? Insurance companies are successful because they spread the risk over a large population and price for the “average” outcome. This “average” outcome allows them to make a profit and simultaneously deliver a valuable service by protecting their policyholders against losses they can’t afford. In our longevity case, some live too long and benefit greatly while others die prematurely and benefit less. But, if you and your spouse have longevity insurance, you’ll have peace of mind knowing you can’t outlive your retirement money. Call your financial advisor and talk to him/her about insuring against this risk.

Shelby J. Smith, Ph.D.
March 2008