If you had a plan for retirement, chances are it has been up-ended in the latest market meltdown. As I mentioned in this retirement blog, Retirement-minded savers and retirees that committed their hard earned money to the “market” have been on a roller coaster ride since 2000. First came the dot.com craze that drove stock prices to dizzy heights. The bubble burst and stock prices sunk dramatically with tech stocks as a group dropping 80%. From 2003 until late 2007, the market trended upward and came close to its inflation adjusted pre-2000 level before again plummeting dramatically. From late 2007 until March 2009, the market shrank by 50%, abruptly surged upward by 30% and for the past two months has vacillated around this plateau. Keep in mind that a 50% loss means a 100% gain is needed to get back to breakeven. Where will the market go from here?

There is only one thing certain about the market: no one knows its future direction. Of course there are always those that make reasoned forecasts, but to my knowledge there is not now, nor has there ever been, anyone who has consistently predicted the future direction of the market. Forecasts are simply “educated guesses” and as such are wrong as often as they are right. Guessing is not a good way to invest your retirement money, unless you are prepared to lose it. Thus, what should you do if your retirement money is in the market?

Start by asking yourself: What am I trying to accomplish? If your answer is “to make a gain” then you must determine if you “can afford a loss” because you have a chance for either. If you can’t afford losses, then the market is not the place for your money. You can keep in the market that part of your money you can afford to lose or don’t plan to use. You’ve been told that “in the long run you’ll do just fine in the market”. The questions are: Do you have a “long run”? Exactly how long is the “long run”? As this is being written in June 2009, the DJIA [widely used barometer of the market] closed at 8750 – exactly the same closing level as in March 1998. Before accounting for inflation, that’s eleven years without growth. If inflation is taken into account, you would have lost 40% of the purchasing power of your retirement money during these eleven years. For the retirement- minded, eleven years – or one-third of an average retirement – is the “long run” and they’ve not done “just fine”. It could get better or worse going forward.

If your objective is to make sure you do not outlive your money, you could be in the wrong place. Instead of measuring how “tall” your money stands, you need to focus on how “long” it will last. Ideally you’d like to have a guaranteed lifetime income you simply cannot outlive. There is only one place to get such a guarantee, regardless of what the market does in the future. That one place is the industry that manages the risk of your home being destroyed, car being wrecked, medical emergencies leaving you bankrupt, and more. That’s right: an insurance company that manages the risk of outliving your money. You can cover this risk by putting some of your retirement money into an annuity with a Guaranteed Lifetime Income Benefit rider. This option is safe, easy to understand and eliminates the risk of living too long.

So if you’re still at Point A and have made no adjustments to your retirement for the new financial landscape, you need a Plan B. Don’t waste another day; get with your financial advisor and review your investments, retirement plans and lifestyle. This will move you from Point A to Plan B… you’ll sleep better and have a much better retirement.

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

The Roth IRA has existed for ten years but is under utilized by financial advisors and retirees alike.  Converting your retirement money to a Roth IRA holds outstanding potential, but unfortunately many that need it most cannot qualify and most that can qualify have bypassed the opportunity.  You can qualify if your total annual income is not more than $100,000.  While higher income individuals cannot currently convert qualified retirement money to a Roth IRA, the income limit will be suspended in 2010.  If you can qualify now, you need to immediately check into this opportunity.  If you do not currently qualify, now is the time to start preparing for 2010 when you can. Following are suggestions you may find helpful.

As I mentioned in this retirement blog, the reasons for converting IRA, 401(k) and other retirement moneys to a Roth IRA are many.  Among the most important is that principal and earnings withdrawn from a Roth are not subject to income taxes.  This tax-free status survives the death of the owner and is passed to the spouse and beneficiaries.  The non-spouse beneficiary must start Required Minimum Distributions (“RMD”) but can stretch withdrawals over their life expectancy – with every withdrawal being totally tax-free.  If future tax rates rise – and the consensus opinion is that they will – paying the taxes now on retirement accounts could make a great deal of sense.  If you plan to pass the money forward to heirs, their prospective tax rate must also be taken into consideration.  If your current retirement accounts are depressed in value – and most are – it is smart to buy out your partner (the IRS) at rock bottom prices (smaller accounts mean fewer taxes).  There are numerous other advantages to a Roth conversion which can be found in the book Go Roth by Kaye A. Thomas (Fairmark Press, 2009).

If your retirement money is now in a 401(k), it probably cannot be moved to a Roth IRA because most 401(k) Plans allow withdrawals only upon death, retirement, termination, disability or financial hardship. But, there is a little known provision in the Employee Retirement Income Security Act (“ERISA”) of 1974 that permits some or all 401(k) money to be trustee-to-trustee transferred regardless of age, without triggering taxes, while still working for the same employer and without giving up participation in your employer’s 401(k) Plan.  This escape hatch is called an In-Service, Non-Hardship Withdrawal provision and is fully explained in Tapping into Your 401(k) Money before Retirement, a book I co-authored and is available free at theretirementpros.com.  Thus, if you currently have your retirement money in a 401(k) Plan but might want to covert some or all of it to a Roth IRA now or in 2010, talk to your employer about changing your 401(k) Plan by adding the In-Service, Non-Hardship Withdrawal provision.  This provision is easy to add, can be done immediately and cost your employer nothing.  The exact steps are explained in my book referenced above.

While Required Minimum Distributions are not required for qualified retirement accounts in 2009, they will again become effective in 2010.  If you are currently taking RMD from your retirement accounts but wish to avoid them, a conversion to a Roth IRA may be the answer.  You, and your spousal beneficiary, are exempt from RMD if your money is in a Roth IRA.  Parenthetically, not having to count Roth withdrawals as income in future years will yield dividends in two ways:

1. Keep you in a lower tax bracket overall;
2. Shelter more of your Social Security money from income taxation.

A Roth conversion is not for everyone, but you may be able to benefit and, therefore, need to investigate the opportunity.  You’ll hear a lot more about Roth conversions as we get closer to 2010.  If you think converting to a Roth IRA makes sense, talk to your financial advisor about the specifics. Also, learn all you can on your own by referencing the Newsletter, articles and webinars on TheRetiriementPros.com and read the books I’ve mention above.  This is a great opportunity for you to shelter some or all of your retirement money from income taxes without taking risks, but you’ll need to start preparing now.

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

Most of us measure our retirement money by how “tall” it is rather than how “long” it is. It’s not how much money you’ve got that’s important, but how long it will last. Because of uncertainties like inflation, taxes, investment losses, emergencies and more, retirees don’t know how long they might live; thus, it is hard to determine how long the “tall money” will last. This is why retirees’ greatest fear is outliving their money, referred to as “longevity risk”. If the “tall money” is laid down over the retirement years it becomes “long money” and longevity risk can be managed. How can this be done?

Insurance companies manage all types of risk by spreading it among many individuals to make the probability of loss predictable. For example, historical records yield the probability of fire occurring in your home and how sprinkler systems, proximity to fire stations and structure type can lower the risk. Insurance premiums are based on these data which make coverage affordable for you and profitable for the insurance company. Everyone pays premiums but only a few file claims for damages; thus, the lucky ones subsidize the unlucky one. Longevity risk is handled the same.

By insuring the longevity risk of many retirees, insurance companies can offer affordable coverage, because those who die too soon (the unlucky) subsidize those that live too long (the lucky). Longevity insurance comes in the form of a Guaranteed Lifetime Income Benefit contained in an annuity. Here’s the way it works: You use your “tall money” to purchase an annuity that pays a competitive rate of interest plus allows you to turn it into “long money” at any time without penalty. The guaranteed lifetime income for the rest of your life means your money will last as long as you do. There are safeguards that keep you from losing money if you die too soon, but never can you run out of money if you live too long. What’s more, you don’t have to turn all your “tall money” into “long money” – just enough, when combined with Social Security and your other lifetime income, to assure you an adequate income regardless of how long you live.

There are other benefits like inflation protection and spousal coverage that can be added to annuities, but each will raise the amount of money needed to get a given income. You can change your mind and withdraw your money lump-sum from the annuity both before and after your lifetime income starts; however, there might be penalties for doing so. Your lifetime income is safe, because it is guaranteed by an insurance company – the same ones that insure your home, car, health, life and business. What’s more, many insurance companies are giant corporations that have been in business for hundreds of years and weathered depressions, wars, failure of governments and financial meltdowns. Your money is safe.

If you want to turn your “tall money” into “long money”, take the time to learn more about the guaranteed lifetime income benefits of annuities. A great place to start is your financial advisor – he or she can help you select the best annuity and needed features to meet your needs, and then shop the market to get you the highest lifetime income. Living too long is a risk just like home fires, auto wrecks, medical problems and other risks that we pay an insurance company to manage for us – so why not longevity risk?

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