There has been a lot in the press recently about the solvency of Social Security and how it could go broke by 2016. As has been previously mentioned in this Retirement Blog, seniors and late boomers are concerned about their future Social Security benefits and want answers. The following will shed some light on the matter.

POLITICAL REALITY
Over 50 millions American families get Social Security benefits, mostly 60+ in age.  All these people vote and they consider Social Security their God-given right because they paid Social Security taxes all their working life.  Coming behind the current recipients of Social Security are 78 million baby-boomers that are now reaching SS age – and they, too, consider SS an entitlement and most of them vote as well.  The first politician that votes to do away with Social Security will be a loser at the next election – regardless of party or tenure: they are GONE.  So, the political reality is that Social Security cannot go bankrupt. Yes, benefits can be eroded [in fact that is what’s happening as taxes go up and the Social Security taxability thresholds are not inflation adjusted], workers and employers will pay more from their wages, plus accounting tricks will be used, but SS benefits for those in need will not be terminated.

ECONOMIC REALITY
Every working American and their employer (even the self-employed) must pay FICA taxes which go into the Social Security Trust Fund.  Most people think the Social Security Trust Fund is a big vault of money that is judiciously managed so that it will be available when benefits must be paid – in fact, you can even get a statement of “your Social Security account”. They are mistaken.  The money that was placed into the Social Security Trust is invested for sure…in U.S. Treasury bonds, bills and notes, also known as I.O.U.s.  All the money put into the SS Trust has been spent but not to worry because the Trust Fund has dollar-for-dollar I.O.U.s from the villain that spent the money: Uncle Sam.  What’s more, these I.O.U.s draw interest – and this interest is paid with more I.O.U. from the same Uncle Sam.  This means that the U.S. Government is really responsible for SS benefits and they have simply used an accounting trick to fool the citizens.  So, if Social Security fails that means the U.S. Government has failed…and should that unlikely event ever happen, the least of our worries will be loss of SS benefits.

PHYSICAL REALITY
The cause of the SS problem is people are living longer than they were when Social Security was enacted.  Of course, giving benefits to those who never worked and/or are not U.S. citizens has worsened the problem.  Currently, most Americans are overweight and far too many are smokers – both of which shorten life. With the alarming rise in medical insurance and costs, it won’t be long before only the rich can afford to see a doctor. This means that obesity and smoking-related illnesses will go untreated and life expectancies will plummet.  And this, my friends, will take care of the Social Security problem.

Shelby J. Smith, Ph.D.
May 2009
TheRetirementPros.com

Related Resources: The Guide to Social Security & a Better Retirement (Video & eReport).     Erasing Your Biggest Retirement Worry (10min Video)   Addressing Your Greatest Retirement Worry (10min Video)

Outliving their money is the greatest fear of most retirees.  Because of massive market losses since 2007, high and rising medical costs and more taxes & inflation as fallout from the unprecedented federal deficit spending, retiree fear is at an all-time high.  But for the stronger gender, females, it is especially alarming, because they are expected to live longer and more likely to encounter financial problems late in life.

According to the U.S. Census Bureau’s latest data, females at birth are expected to live 80.4 years compared to the 75.2 years for males.  This gap narrows as age increases, but even at age 65 the female is expected to live another 20.8 years, while her male counterpart is given only 17.8 more years.  What’s more, women are much more likely to be living alone in old age than are men.  Census data show that at age 75 women are 2.5 times more likely to live alone than men.  About three-fourths of the women age 80-84 live alone, whereas only one-fourth of the men of the same ages live alone.

The Census data show that over one-half of married men are two or more years older than their wife, whereas only one-tenth of wives are older than their husbands.  These marriage statistics, combined with longer life expectancy, cause women to have greater fear about outliving their money in retirement.  In addition to being generally younger and having longer life expectancy, other reasons fuel longevity fear among women:

1. they are more likely to lose Social Security benefits due to a spousal death;
2. end-stage medical expenses can decimate retirement savings;
3. medical costs and/or convalescent care expenses rise dramatically with age.  How are women protecting themselves financially from the longevity risk they face?

In recent years the insurance industry has begun offering guaranteed lifetime income riders on fixed and index-linked annuities.  Unlike variable annuities, fixed/index-linked annuities are free of market risks if held for the stated term.  Retirement money can be placed in a fixed/index-linked annuity at any age and then at retirement turned into a lifetime income that cannot be outlived, even if the underlying retirement account is zero.  The beauty of this retirement option is that at any time the annuity-holder can change their mind and withdraw some or all of the remaining money in their account.  The issuing insurance company makes available a variety of options (inflation protection, joint spousal coverage, guaranteed earning until income is started, etc.) which permits the coverage to be tailored to fit most circumstances.  When combined with Social Security benefits, this innovative development permits retirees of both genders, but especially the female, to have peace of mind in retirement knowing that outliving their money is no longer possible.  If interested in securing this safe money option with some or all of your retirement money, you should discuss annuities and guaranteed lifetime income benefit riders with your financial advisor.  Parenthetically, annuities are the only retirement option that offers you the lifetime security of a guaranteed income.

Shelby J. Smith, Ph.D.
May 2009
TheRetirementPros.com

Related Resources: Erasing Your Biggest Retirement Worry (10 min Video Webinar),   Tax-Free Retirement Income & More (12 min Video Webinar)   Where You Should Put Your Retirement Money (10 min Video)

Many Americans of yesteryear relied on employers to provide a defined benefit pension at retirement.  They were guaranteed a lifetime income whose amount was based upon how long they worked for the employer and their ending salary. For example, a defined benefit pension plan might pay a retired worker 2% of their last year’s salary for every year over twenty they worked for the employer.  This meant a 40-year employee could expect to receive 80% of their final year’s income as a lifetime pension at retirement.  The income would continue for their lifetime and then the surviving spouse might be entitled to reduced income until death.

Some large unionized employers still provide such lifetime income but mostly employers have switched to defined contribution plans such as 401(k).  These new-type plans require employees to make contributions which their employer may match up to a certain amount.  At retirement employees can keep their retirement money in their ex-employer’s retirement plan [not a good idea] or move it to a self-direct IRA [which should be done].  At retirement the task of managing the money falls on the retiree and this is when potential problems surface.  There is a bewildering array of investment choices each offering different benefits, limitations and risks.  Retirees are repeatedly bombarded with advertisements to invest in mutual funds, stocks, bonds, variable annuities and more, but seldom are the risky edges exposed until it is too late. At the other end of the options continuum are bank CDs and U.S. Savings Bonds whose rates do not keep pace with inflation.  Wouldn’t it be nice to have yesteryear’s guaranteed lifetime income and be totally immune from market and interest rate risk? You might be surprised to know that such is possible, even easy.

Insurance companies have risen to the occasion in response to the greatest fear of most retirees: outliving their money.  This fear is so common that it has been given a name: longevity risk.  Pooling risks across many people makes losses predictable and allows insurance companies to manage risk.   Insurers have transformed one of their common products, annuities, to pool longevity risks and provide guaranteed lifetime incomes.  The insurance principle is simple: those who live shorter than expected subsidize those who live longer than expected.  By careful pricing insurance companies offer a valuable service and also make a profit.  So how does this translate into a guaranteed lifetime income?

Let say you now have $250,000, are age 60 and want a guaranteed lifetime income at age 70 when you plan to retire and start Social Security.  You would enter into a contract with an insurance company (the same one that insures your home, car, life, health, etc.) whereby you deposit with them the $250,000.  In exchange, they guarantee you at least 8% growth annually for the ten years until you reach age 70 and then pay you 6% of your account balance annually for the remainder of your life.  At age 70 your account will total at least $539,731 (8% annual growth) and the guaranteed annual income paid to you by the insurance company will be at least $32,384 (6% of $539,731) regardless of how long you live. Combined with your SS benefits, you’re assured of never running out of money.  You’ll also have options to protect your spouse, adjust for inflation, pass to heirs all unused money and can even withdraw your money lump-sum if you change your mind.  You have successfully transformed your defined contribution retirement plan (401k, IRA or other) into a defined benefits plan (guaranteed lifetime income).  The best plan is to ask your financial advisor how to get started and which options are best for you.  Don’t hesitate, start your investigation today.

Shelby J. Smith, Ph.D.
May 2009
TheRetirementPros.com

Related Resources: Erasing Your Biggest Retirement Worry (10 min Video Webinar),   Tax-Free Retirement Income & More (12 min Video Webinar)   Where You Should Put Your Retirement Money (10 min Video)

When leaving an employer at retirement, changing jobs, down-sizing or starting your own business, leave behind only what belongs to your ex-employer. That means not forgetting your retirement plan money! About forty percent of departing employees, ages 60 to 65, leave their retirement money behind in former employers’ plans. They cite several reasons: loyalty, hassle of transferring, fear of managing the money or bad advice. There are many good reasons why you should take your retirement money with you, but we’ll discuss only the very important ones.

First, the fees and changes associated with an employer’s plan are relatively high and, unbeknownst to many employees, are not paid by the employer but by the employees. If you move the money you can invariably lower the fees. Lower fees can add up to serious money over long periods of time. For example let’s say you are now paying 1.75% annual fees on your mutual funds managed inside the employer’s plan. You can transfer these moneys to a low-load or no-load account under your control and pay a fraction of the fees. The savings of 1.75% on $100,000 annually over a ten year period amounts to about $22,000 if you assume an earnings rate of 5%. Don’t fret about the loss of investment advice because you were getting none from the broker or company managing the employer’s plan. You’ve lost nothing except the fees.

You’ll generally find that your employer’s retirement plan has a limited number of investment options, mostly mutual funds (or variable annuities) and possibly the stock of your employer. By transferring your money and assuming the responsibility for management, you can increase the investment options to a virtually unlimited number. In fact, you’ll be able to select mutual funds, annuities, stocks, bonds, bank CDs, real estate, precious metals, and many other choices except life insurance. This means you can move your money from “risky places” like stock, bonds, mutual funds and variable annuities to “safe places” like bank CDs, fixed annuities and government savings bonds. Sadly, most employer retirement plans do not provide lower risk alternative for those nearing retirement age. The consequence is that many in retirement’s red zone have their plans derailed by a market meltdown. Remember 2000-2002 and late 2007–present?

Most faced with the “move it or leave it” decision are needlessly concerned about tax consequences. You can transfer tax-free your money from a company-sponsored retirement plan to your control with a trustee-to-trustee transfer. You simply direct your employer to transfer your money directly to another trustee (annuity company, bank, brokerage firm, etc.) that you have chosen. If you have the money sent directly to you there is a 60-day time limit to get it to the new trustee and taxes may be withheld that can be recovered only when you next file your tax return. Trustee-to-trustee transfer is the way to go. There should not be a charge to move your money or to open a new account with another trustee. If you are still concerned about transferring and want to make double sure no mistake is made that triggers taxes, ask a financial advisor for help. In fact, it is always prudent to find and use a financial advisor to help you plan a safe and secure retirement.

One last word of caution: if your employer has provided you a “lifetime pension” at retirement and you have a lump-sum settlement option, you’ll need to do some homework. Specifically, find out how much your lump-sum settlement will be and have your financial advisor shop the market for a lifetime income that can be purchased. You can then compare the outside option with your employer’s lifetime income guarantee. Naturally, you’ll want the advice of your financial planner because the two options may involve other considerations that merit analysis. When you leave an employer and become an ex-employee – for whatever reason – always take your retirement money with you.

Shelby J. Smith, Ph.D.
May 2009
TheRetirementPros.com