For many, rough economic times are knocking retirement income plans askew, leaving those approaching or in retirement with the task of repairing and rebuilding lost wealth, according to insurance and financial planning experts.
So, where should a market battered consumer start? The first rule is simply to know yourself, according to Mark Singer, a certified financial planner based in Lynn, Mass. “Know where you are, who you are and what you need,” he advises. By that, Singer says you need to know how much you will need on a monthly basis in retirement. Some do not know when they have attained their goal and are like bicyclists who just keep pedaling and pedaling, he explains. Singer works with clients to achieve that goal, using both expertise and investment platform tools from companies like Curian Capital, Denver, Colo.
The reason that this is important, Singer continues, is that once you have attained your goal, you can adjust your retirement income portfolio so that it holds investments that have less risk. This is possible because you no longer need the extra risk that comes with extra return.
Once a client understands what is really important to them and what is really needed for income, Singer says that he adds another 15-20% as a margin of error because “no one captures all the line items.” For instance, he says, a client might be looking at a gross figure rather than a net total amount of what is needed. Income taxes must be figured in as well as discretionary items such as a trip to Italy or making home improvements.
Singer also advises taking smaller monthly amounts of retirement income when you start retirement so that more of your portfolio can continue to grow.
Drew Denning, vice president-retirement services division, Principal Financial Group, Des Moines, Iowa, also strongly advises not taking too much of retirement income out of a portfolio at the start of retirement. But in order for retirees to understand this, he says that education is needed. A recent poll showed that 64% of respondents thought that an 8% or higher withdrawal rate was sustainable when the actual figure is 4-5%, Denning notes. And, he says that whatever the target withdrawal rate, you need 20-25 times that in your portfolio. So, for instance, if a retiree wanted to withdraw $1,000 annually, $20,000-$25,000 would be needed, Denning continues.
Denning says that “most are very unaware of what their financial situation actually is.” There was a gap of what retirees think they need and what they actually have that has only grown bigger with the recent financial turmoil, he adds. For example, most are not even aware of what health care costs and even if Medicare is used, there might still be $10,000-$15,000 in co-pays and premiums paid each year, Denning explains.
A solid understanding of one’s position is needed before one can even think about what financial products will help achieve a retirement goal, he continues. And many products such as certificates of deposit and immediate fixed annuities, while valuable products, are not paying good rates of interest right now, he notes.
One of the concerns with immediate annuities is that if the purchaser dies soon after the purchase, payments will cease and the family will never recover what was invested in the annuity, Denning says. But, he notes, only 7% are sold without the rider for an installment refund. Of course, he adds, that rider comes at a cost, reducing monthly payments by 5-8%.
In the high net worth market, traditionally, the major concern has been about protecting lifestyle, according to Walter Zultowski, senior vice president of research and concept development with Phoenix Companies, Hartford, Conn. But increasingly there is a shift to concerns about running out of money, he adds. That concern has grown since many retirement assets have taken a hit and been diminished, Zultowski continues.
And, interestingly enough, he notes, people do have a sense of how long they will live. People who have been asked about their life expectancies have had “uncanny ability to estimate their life expectancies to within a few years of actuarial projections.”
One of the things that happened following past recessions, Zultowski says, is that there is more product innovation to meet lessons learned. This time will be no different, he continues citing his company’s new universal life product that pays out on the death of the first spouse as an example of what is starting to surface in the market. There will also be more of a merger of elements of the insurance and investment world in future products, Zultowski predicts.
But, he continues, there is no substitute for a return to basics including maximizing a 401(k) plan when possible and periodically reviewing and rebalancing investments within that plan. Zultowski also notes, rebuilding lost wealth not happen overnight.
This article first appeared on Filife.com.
Wednesday, September 16, 2009
Rebuilding A Battered Retirement Income Plan After The Economic Storm
Posted by Jim Connolly at 7:36 PM
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Nice Article, i wants to include some more to this....ReplyDelete
Some of these plans are also growth investment plans with assured Lump Sum Annuity in addition to some health coverage plans, etc. Some investment plans include payment of Lump
Sum Annuity to the spouse or any other nominee either at the same rate or at a revised rate.