The retirement-minded have been glued to the developing bailout of Wall Street knowing that the side-effects are going to impact their retirement.  Whether you’re just thinking about retirement or are already there, the bailout of Wall Street, banks and mortgage holders will have consequences – and so will no bailout if that is the way the cookie crumbles.  What’s more, as the financial malady spreads world wide the magnitude of the downside effects worsen.

If the bailout occurs and massive amounts of money are injected to absorb bad loans and right the economic ship, the soaring deficit will further weaken the dollar, boost the need for tax hikes and ratchet inflation to an even higher level.  While these consequences augur poorly for folks on fixed incomes already in retirement, a south-sailing economy will dampen the need for employees of all ages.  As the economy grinds to a lower gear under the extra weight of higher prices, lower disposable income and slack job opportunities, saving extra for retirement to compensate for earlier over-consumption will be impossible for most.  What was once a tenuous retirement will develop into a dependency on others or continued employment.

What will be the fate of the retirement money currently invested?  If in the market, the purchasing power could be severely eroded by a depressed market that is struggling to climb the hill back to break even – assuming it was not exposed to total loss from bankruptcy, forced merger or regulatory confiscation.  If in the safest port of all – bank deposits insured by the FDIC – the rate of return is anemic when compared to inflation and purchasing power will suffer a torturous fate of shrinking in value.  The ace in the hole – home equity – could be difficult to unlock as buyers become scarce and/or the supply-demand imbalance melts away equity.

The bailout means higher taxes, increased inflation and most likely a weaken economy – none of which are good for retirees or the near-retired.  What’s more, the severity of the downturn and the period of adjustment needed to return to normal could indeed be steeper and longer than most economic cycles.

What if the bailout is aborted?  The credit markets are likely to freeze with the consequences that money cannot be borrowed and commerce cannot be efficiently conducted.  Credit to the economy is analogous to motor oil for an engine – the lack causes the engine to seize up and not function.  As money dries up so does the ability to finance the expansion of businesses and payrolls are more difficult to meet.  Again, the economy grinds to a lower gear with unemployment rising and payroll dropping.  The government will have the option of raising taxes to balance the budget or risk run-away inflation by monetizing the debt by printing more money.  The balancing act of just enough government intervention and the right amount of free market latitude will be exceedingly difficult to engineer. Accordingly, the economy is likely to head off in the direction of abyss or go the opposite way toward runaway inflation.  Either way, retirees and those near-retirement will be worse off.

Regardless of whether the bailout is funded or withheld, there will be undesirable consequences for the retirement-minded.  In the long-run the market will come back and many of the anemic investments will recover and be just fine.  The only problem is that when the “long-run” has played out most of retirement may be distant memory.  What you can do now is crunch the number to determine if you can afford to lock up an adequate guaranteed lifetime income that will give you a comfortable retirement.  Don’t leave your retirement in the market and watch it melt further if you still have enough to “buy” a good retirement – seek out your financial advisor and talk about converting what you have to a safe investment that can be turned into a guaranteed lifetime income.  Outliving your money is called longevity risk and most insurance companies will insure that risk by issuing you an annuity that can be converted – usually on your time frame – to a guaranteed lifetime income for you and/or your spouse.  Check it out before it is too late.  How you reward your elected politician when you cast your ballot is your business – but by my way of thinking we need a political housecleaning more than we do an economic makeover.  Cast your ballot wisely because our leaders do make a difference.

Shelby J. Smith, Ph.D.
September 30, 2008

If you’ve read my book Guide to Social Security… and A Better Retirement and I talked about it in my retirement blog, 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.  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 not what they should have done.  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’s say you started at age 62 and have been drawing $1,000 a month for eight months but now want to reapply.  Along with form 521 you’d repay the $8,000 and then you can reapply when ready.  If you filed a tax return during the period, you’ll want to report any overpaid taxes on your next tax return.  If you wait until age 70 to reapply, your benefits will grow about 8% annually, plus cost-of-living adjustments, which means your benefits will more than double those at age 62.  My Guide to Social Security gives several other good reasons to postpone Social Security if you can 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 66 (normal retirement age for both) and eligible to start SS benefits.  Both worked outside the home, and at age 66 each is entitled to $1,500 in monthly Social Security benefits, plus annual cost-of-living adjustments, for the remainder of their lifetime.  A Mortality Table shows that Sue is expected to outlive Fred by several years.  The Social Security regulations say that one spouse is entitled to what they qualify for based on their own 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 record.  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.  If you think this is “on the edge”, think about the combinations for divorced spouses.  If you were married for ten years, been divorced for two years, are age 62 or more and have not remarried, you are eligible to apply for dependent benefits based on the working record of your ex-spouse.  If you have several ex-spouses that meet the foregoing qualifications, they can all be drawing SS benefits simultaneously with no impact on your, or a current spouse’s, future benefits.  Even if a qualifying ex-spouse gets remarried and subsequently divorced, they can still file for dependent benefits based on a former spouse’s work record.

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 indexed to inflation and tax-favored, making them a relatively 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.  By using these loopholes, you’re adding to the financial woes of the Social Security System, but until Congress closes the gate you should exercise your options.

Shelby J. Smith, Ph.D.

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

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

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