Managing Post-Retirement Risks: Employment

Many retirees plan to supplement their income by working at a bridge job part-time or full-time.

Today's jobs often make few physical demands and may even be done at home. Some organizations prefer to workers because of their stability and life experience. But success in the job market may also call for technical skills that retirees cannot easily gain or maintain. Training and retraining have become increasingly important for those who want to work at older ages.

Predictability

Employment prospects among retirees vary greatly because of demands for different skills, and can change with health, family or economic conditions.

About half of all retirees retire earlier than planned, often because of job loss or poor health.

Managing the Risk

Retirement plans rarely allow for phased retirement, so a bridge job usually means working for a new employer. Re-hiring of retirees also is growing more common. These kinds of jobs often have lower pay or benefits.

Postponing retirement may be the most powerful way for workers to improve their retirement security. This allows retirement savings to keep growing while the workers accumulate more benefits from Social Security and retirement programs. Medicare-eligible retirees can take a job knowing that they will have health care coverage, even if the employer does not offer it.

Conclusion

Retirement planning should not rely heavily on income from a bridge job.

Many retirees welcome the chance to change careers and move into an area with less pay but more job satisfaction, or fewer demands on their time and energy. However, it may be difficult to find jobs in tight employment markets.

Terminating employment before age 65 may make it difficult to find a source of affordable health insurance before Medicare is available. Note that COBRA coverage usually ends after 18 months (36 months if disabled). As of 2014, health care coverage is available through state exchanges (most states).$
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Managing Post-Retirement Risks: The Stock Market

Stock market losses can seriously reduce retirement savings. But common stocks have substantially outperformed other investments over time, and thus are often recommended for retirees' long-term investments as part of a long-term investment mix.

Predictability

Individual stocks rise and fall based on the outlook for the stock market and the specific company. Individual stocks are more volatile than a diversified portfolio.


Stock index funds are diversified, but they still are exposed to the ups and downs of the stock market.


Managing the Risk

Stock market investors should diversify widely among investment classes and individual securities, and be prepared to absorb possible losses. Because it may take many years to recover losses, older employees and retirees should be especially careful to limit their stock market exposure.


A variety of polled investment "funds" exist, ranging from mutual funds and exchange-traded funds to managed accounts to hedge funds.


Hedge funds, which are private investment funds that participate in a range of assets and a variety of investment strategies, may offer some protection, but they can be complex and have high expense charges.


Stock funds offer opportunities to invest in both U.S. companies and international stocks.


Conclusion

Some financial products let an individual invest in stocks and guarantee against loss of principal. However, expenses on these products may be high, and the financial firm may limit losses by shifting most funds to bonds, thus reducing the stock exposure.


Younger workers can afford to take more risks because they have time to make up short-term losses and can postpone retirement. Older individuals might want to allocate a smaller proportion of assets to the stock market.


Target-date (or "life-cycle") funds gradually shift some of their assets out of stocks as the investor gets older. In target-date funds designed by different fund managers, the allocation to stocks at a given age varies. Proposed regulations would increase disclosure to consumers about target-date funds to bolster understanding of what these funds do and don't do.


When significant personal assets are in company stock, the risk of job loss is compounded by possible loss of savings if the company does poorly or goes out of business. Even if a company appears strong, it is safer to diversify those assets among other investments.$


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Managing Post-Retirement Risks: Interest Rates

Lower interest rates tend to reduce retirement income in several ways:

• Workers must save more to accumulate an adequate retirement fund.
• Retirees earn less spendable income on investments such as CDs and bonds; any income reinvested earns lower rates.
• Payout annuities yield less income when long-term interest rates are low at the time of purchase.

Predictability

Long-term and short-term interest rates can vary within a wide range. Underlying forces that drive interest rates include expected inflation, government actions and business conditions.




Managing The Risk

Income annuities provide retirees with a guaranteed fixed income, despite changes in the interest rate environment, but most do not adjust the income for inflation.


Prevailing interest rates will impact the amount of annuity payout the retiree can purchase from a given lump sum.


Investing in long-term bonds, mortgages or dividend-paying stocks also offers protection against lower interest rates, although the value of these investments will fluctuate. The risk is that rising interest rates will reduce the value of such assets available to meet unexpected needs.




Conclusion

Long-term interest rates often move up or down at about the same rate of inflation.


Higher real interest returns, above rates of inflation, usually make retirement more affordable. this occurs when retirees' assets include sizeable amounts of interest-paying bonds, CDs, etc.


However, some retirees have adjustable-rate mortgages or substantial consumer debt, so higher interest rates are an added burden. For such retirees, the higher interest rates that accompany increased inflation may reduce their spendable income just when it's most needed.


Low interest rates in some recent years make it clear that retirees relying on income from interest-bearing investments are subject to interest rate risk.$




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Managing Post-Retirement Risks: Inflation

Inflation should be an ongoing concern for anyone living on a fixed income. In the recent era of relatively low inflation, workers may not know about or remember the double-digit inflation of 1947, 1974 or 1979-81. Even low rates of inflation can seriously erode the well-being of retirees who live many years.

Predictability

Average past inflation can be calculated from historical data, although actual experience over a typical period of retirement may vary widely. Past inflation data can provide some help in estimating retirement needs, but there is no guarantee that future inflation will match historical experience.

Managing the Risk

Many investors try to own some assets whose value may grow in times of inflation. However, this sometimes results in trading inflation risk for investment risk.

Investment returns from common stocks have increased more rapidly than consumer prices in the long run. But in the short term, stocks don't offer reliable protection against inflation. The historically higher returns from stocks are not guaranteed and may very greatly during retirement years.

Inflation-indexed Treasury bonds grow in value and provide more income as the Consumer Price Index goes up. Many experts say that retirees' investments should include some of these securities.

Inflation-indexed annuities, not widely used in the United States, adjust payments for inflation up to a specified annual limit. Annuities with a predefined annual increase also are available. These kinds of annuities cost more than fixed-payment annuities with the same initial level of income.

Investments in natural resources and other commodities often rise in value during periods of long-term inflation, but the values may fluctuate widely in the short run.

Conclusion

Inflation can be a major issue, especially as retirement periods lengthen. Inflation is not highly predictable.

Retirees can set aside assets that will permit a gradual increase in consumption.

Providing for expected inflation one way or another, although costly, is needed in any realistic plan for managing resources in retirement.

Delaying receipt of Social Security will build up valuable inflation-indexed benefits for retirees and spouses.

When housing values were increasing, homeowners seemed to have a hedge against inflation, but this has not been true in recent years.

Current and future retirees who have expected to use their home equity as a source of retirement income may be sorely disappointed, especially if housing values continue to decline. Strategies that rely on increases in the value of housing and selling quickly are very risky, since the value may not rise and it may take a long time to sell the house.$

Next Risk: Interest Rates

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Managing Post-Retirement Risks: Longevity

The past decade has seen not only economic uncertainty and volatility, but also an increased emphasis on individuals taking responsibility for securing their financial well-being in retirement. As a result, today's retirees may be exposed to a variety of risks that can affect them both as individuals and as members of society.

Longevity: Outliving Retirement Resources

Managing one's own retirement funds over a lifetime has many pitfalls, even with expert help. Nobody knows how long the money must last.

Life expectancy at retirement is an average, with some retirees living longer and a few living past 100. Counting on living only to a certain age is risky, and planning to live to the average life expectancy for someone their age will be inadequate for about half of retirees. In theory, retirees want to make sure their money will last a lifetime without cutting back on expenditures or reducing their standard of living. In practice, unexpected events may make this very difficult.

A licensed insurer is the only entity outside the government that can contractually guarantee to pay lifetime income. However, purchasing an annuity involves trade-offs; the household must give up the account balance to purchase the income stream. Financial products from firms that aren't in the insurance business could run out of money to pay income to a long-lived individual.

Predictability

Long lifetimes are difficult to predict for individuals. It's easier to predict the percentage of a population with a long life than to do so for an individual. In the total population, women live longer than men and wives outlive husbands in most cases.

Longevity has increased over time. Any medical breakthroughs could bring additional improvement.

Managing the Risk

Social Security, traditional pensions and immediate payout annuities all promise to pay an individual a specified amount of income for life. In addition, they may also pay income to the surviving spouse or other named survivor. Some newer products can help protect retirees from outliving their assets.

Deferred variable annuities and indexed annuities can include guaranteed lifetime withdrawal benefits that guarantee the availability of annual withdrawals up to a specified amount, even after withdrawals have exhausted the account value.

"Longevity insurance" is an annuity that guarantees a specified income amount but does not start paying benefits until an advanced age, such as 85. This niche product may fit into a carefully designed financial plan.

"Managed payout" plans, offered in several forms by financial services firms, enable the retiree to draw down assets gradually. Lifetime income from such plans is not guaranteed, but is set at a level that provides a high probability that income can be received for many years, e.g., to age 90. In some cases, a "contingent deferred annuity" can be added to guarantee that the income payments will continue for a lifetime.

A Reverse Mortgage can convert home equity into ongoing monthly income as long as the homeowner lives in the home. Administrative charges for these mortgages can be high.

Conclusion

"Payout annuities," also called immediate annuities or income annuities, can be useful for retirees because they maximize the amount of guaranteed lifetime income available from a sum of money.

Some mutual fund companies are offering "annuity alternative" arrangements to ensure liquidity in retirement with cash/mutual fund structures that can be blended with annuities.

An annuity that seems unattractive to buy at retirement age may make sense later. Multiple annuity purchases can be made over time to average interest rates inherent in their purchase prices. People generally should not annuitize all their assets, but they may want to consider annuities in their overall retirement plan.

Financial projections can be very useful in retirement planning , but actual experience will differ. All retirees should review their expected income needs and sources at least every few years and adjust spending if necessary.

Reverse mortgages can help to mitigate risk in some cases, but they may also increase it in others. Care is needed in the use of these products. The mortgage proceeds can be paid in a lump sum, as a monthly income, or as a line of credit.

Annuities and reverse mortgages differ in an important way. When interest rates are higher, you get higher monthly payments when you buy an annuity. In contrast, when interest rates are higher, you get lower monthly payments if you take out a reverse mortgage.

Retired individuals with outstanding mortgages can effectively improve their monthly cash flow by replacing the conventional mortgage with a reverse mortgage, using the lump sum proceeds of the reverse mortgage to pay off the conventional mortgage.$

Next up: Inflation

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Life Insurance - Your Retirement Account's Best Defense

The single best, most cost-effective yet amazingly underutilized strategy for protecting retirement account balances, especially large ones, from being decimated by the highest levels of combined taxation is buying life insurance to offset the tax burden beneficiaries may face.

How Much Life Insurance Should You Have?

You should have enough to cover the taxes and other expenses that must be paid on your estate after you're gone. To do that you will need to know the balance in your account at the time of your death, which means you will have to project that balance. You cannot go by today's market or values - because if you have an IRA that's worth, say, $1 million right now and you are only 60 years old, that IRA could easily be worth $5 million or more over the long term given today's long life expectancies.

A good rule of thumb is to buy enough life insurance to cover at least 50 percent of the projected value of you estate at your death. That may seem like a lot of insurance to buy now, but as you and your account grow older and fatter, not only will purchasing more life insurance become an increasingly expensive proposition, but if your health deteriorates, you may become uninsurable.

A quick way to estimate the value of your IRA (without taking withdrawals or taxes into account) is to use the "rule of 72." This is a little math trick that shows how many times over the years your retirement account money will double at a given interest rate. Just divide 72 by an estimated average interest rate. For example, if you use a conservative interest rate of, say, 6 percent, that means your money will double ever 12 years (72/6 = 12). An 8 percent rate would double your money every 9 years (72/8 = 9), and so on.

Let's use the rule of 72 with some dollar figures, and say your IRA isn't a million but $300,000, and you're not 60 years old but 50 (with a life expectancy of 86).

Using an average 8 percent interest rate for the rest of your life, the value (straight growth excluding withdrawals or taxes) of your $300,000 IRA will double every nine years (72/8 = 9), so that by the time you reach 86, your $300,000 IRA will have doubled four times and be worth $4.8 million!

It is absolutely astounding what compound interest can do, especially in a tax-deferred account such as an IRA. That is why even people with modest retirement accounts need life insurance. Through the magic of compounding, even the smallest accounts can well exceed the estate tax exemption (currently $5.34 million) come inheritance time.

So, there you have the "Insure It" step. It really is amazing to see how powerfully a creative but simple life insurance plan can build tax-free wealth, isn't it? Can you imagine choosing tax confiscation of your retirement account when this alternative exists? And yet many hundred of thousands continue to do just that, even with professional advice.

But you're not going to be one of them, are you?

You've seen the light!$

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Source: The Retirement Savings Time Bomb...And How To Defuse It by Ed Slott

Retirement Income Planning: Risky Business



With millions of baby boomers in or nearing retirement, a huge concern is what to do with the trillions of dollars in retirement savings that they have accumulated. How do they reinvest their savings, ration it over time, or protect it from taxes?

Few employer-sponsored retirement plans offer advice or options for converting savings into retirement income. Many people will leave their plans with a lot of money but no strategy for investing it, protecting it from taxes, or spending it. Without a strategy, an employee may withdraw her money in one lump sum, fail to roll if into an IRA, and lose 25 percent of it to taxes in the first year. Obviously, the a sense of an income plan raises the risk of running out of savings during retirement. 

Running out of money in retirement is too large a risk to self-insure. Retirees need the best information and tools to help them determine how much income they will need, where the money will come from and how to make it last. They need access to safe, affordable lifetime income products.

Given the continued importance of individual responsibility in accumulating and managing retirement assets, there is a greater need than ever before for education and guidance. Individuals who do not fully understand their situation can be unduly influenced by emotions. For example, as the Hueler Companies noted in in its written statement to the United States Senate Special Committee on Aging in June 2010, research indicates that retirement decisions are often influenced by behavioral factors - such as fear of the unknown, lack of trust, and desire for control.

Retirement age plays a critical role
One of the most important decisions individuals face is when to retire. The Society of Actuaries 2007 and 2009 Surveys Post-Retirement risk indicate that many people do not fully understand the impact of retiring later, and that they underestimate the impact of working longer. In addition, the decisions surrounding Social Security claim in age are misunderstood, especially by couples.

An unprecedented challenge 
The challenge for those who are pension-less - including those who have ample savings - will be to convert those savings into do-yourself pensions. The new retiree will face three important risks: sequence-of-return risk, investment risk, and longevity risk. These risks exist for almost everyone, but not everyone chooses to acknowledge them - and even fewer choose to insure against them. Transferring these risks are for people who choose not to ignore:

• Investment risk: The possibility that your portfolio won't earn enough to support you in retirement.
• Sequence-of-returns risk: The chance that, just before or after you start drawing down your savings, a sharp market downturn and take a huge bite out of your portfolio and greatly increase your chance of running out of money too soon.
• Longevity risk: The chance that you'll outlive your financial resources.

In the distant past, many people worked at a single company for their entire career. At retirement, most people left the company with a pension that took care of their retirement income needs for the rest of their life.

When it came to figuring out retirement income, all one had to basically do was fill out a form to determine how they wanted to take their pension and whether or not they wanted to include a spouse. From there, their job was quite simple: merely deposit each check every month (before direct-deposit days) for the rest of their lives.

All the difficult and complicated decisions as to...

• Where to invest
• How to get the most amount of income
• How to compensate for inflation
• How to ensure one wouldn't run out of money
• How to keep income flowing to a surviving spouse

...were left in the hands of professional actuaries and managers who collectively spent all their time making all these complex decisions for us.

These days, however, things have changed quite a bit. Especially of the last decade, pensions have quickly become a dinosaur of the past. Only a select few still get them and for those that do, governments and corporations are successfully reducing, and in some cases, completely eliminating them.

So it's now up to us individuals to do the job that those full-time, experienced pension managers once provided. In most cases, retiring simply means retiring from one's job but the work isn't over. In many cases, it's just begun and this new work is being the CEO of your own retirement company. Are you prepared to handle this responsibility and these risks on your own?$

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