Nonetheless, retirement planning is rarely done and many retirees continue to invest the same as when they were working. Retirees commonly keep their life savings in “the market” – the same market that has melted down twice since 2000 and is currently volatile and unpredictable. Money kept in the market can die unexpectedly; therefore, prudence says consider the suitability of a safer course unless you harbor a “death wish” for your money. What can be done to protect your money and your retirement?

Start by measuring how much dependable annual income you’ll have in retirement: Social Security, pension, rental income, dividends, investment income, etc. and conservatively assess the likelihood of their continuation. Next, measure what you expect to spend annually in retirement, making sure to adjust for inflation. Expected income minus expected expenditures will provide the annual shortfall (or surplus if you’re lucky). Assume your expected annual income will be $50,000 and your anticipated annual expenditures are $65,000, leaving you with a $15,000 annual shortage. Let’s say your current age is 65 and you expect to live to age 95. The shortfall over 30 years will amount to $450,000 ($15,000 x 30 years). Compare this amount to your current investments & savings and ask yourself: is a market gamble, and possible “money death”, worth the risk?

The foregoing glosses over many important things that should be included in your retirement plans. If you do not feel comfortable in completing your retirement planning, you can still make your retirement plan fail-safe without hassle or worry? First, find and work with an experienced financial advisor that specializes in retirement. Second, talk with him/her about a guaranteed lifetime income that cannot be outlived. The huge wave of retiring baby boomers has prompted insurance companies to offer certain, predictable, guaranteed lifetime incomes that can be locked up today by using some of your retirement money. There will be a plan that is suitable for your needs. Insurance companies manage risk by spreading it over thousands of lives – the same principle used for all types of insurance. You transfer other risks (health, home, car, business, etc.) to an insurance company, why not the risk of retirement “money death”? Planning your retirement by using professional guidance and considering all the options can save your money from premature death. Investing the same as always could lead to your greatest fear: death of your retirement money before retirement ends. Can you sleep with the risk?

Assume you’re 65, have $300,000 in an IRA not needed for retirement and your tax bracket is 35%. You actually only own 65%, or $195,000, of your $300,000 IRA because 35% will go for taxes. If you withdrew the IRA money today and paid the taxes, the remaining $195,000 would purchase a single-pay life insurance policy with a death benefit of $750,000. No more payments are required and the $750,000 death benefit will pass tax-free to your beneficiary. If the money is left in the IRA and the 35% tax bite remained unchanged, your IRA must grow to $1,153,846 to deliver the same $750,000 after taxes. At age 65 you have approximately 20 years to live which means your IRA money must grow at a compounded rate of 7% to equal the life insurance benefit. What’s more, your life insurance offers protection if you die prematurely, provides lump-sum cash value for emergencies and tax-free retirement income if desired.

Another approach would use life insurance to pay the equivalent Roth IRA conversion taxes after your death. Rather than converting to a Roth and paying the taxes lump-sum now, a more affordable strategy could be to purchase (with installment payments) a life policy with a death benefit equal to what the IRA taxes are likely to be in 20 years. In effect, you’ve converted your IRA to a Roth IRA, but will pay the taxes after your death.

If you want to manage your tax liability over several years you could use your required IRA withdrawals to purchase life insurance with annual installment payments. You’ll still have the policy’s cash value for emergencies or tax-free retirement income. If your IRA money is in an annuity, you can use the free withdrawal to buy life insurance and get the same tax-free results. Most annuities provide at least 10% free withdrawals annually after the first year. You’ll have to pay taxes on the IRA or withdrawals but the enhanced benefits you’ll leave will be free of taxation.

Life insurance offers three valuable benefits not found in any other single investment: tax-deferred earnings that build cash value faster, tax-free access to the cash value via loans that do not have to be repaid and tax-free death benefits. Many life insurance policies do not require future premium payments if you enter a nursing home. Additionally, they pay the full death benefit upon the diagnosis of a terminal illness and payments are triggered to cover the expenses of convalescent care. In years past life insurance was for those that died prematurely but today’s policies protect those with disabling illnesses or those fortunate enough to live a long life. Accordingly, I encourage you to work with your financial advisor to use life insurance to leave a tax-free legacy rather than paying taxes on IRA money not planned for use in retirement. Incidentally, you do not need to be in exceptional health to qualify for life insurance, nor does age disqualify you.

Shelby J. Smith, Ph.D.
February 2012

The greatest fear of most retirees is not having an income for the remainder of their life. This means as you near retirement you need a plan to convert assets into income. No doubt you’ll have some Social Security but chances are it will not be enough; consequently, the challenge will be converting 401(k), IRA and investments into a guaranteed lifetime income you cannot outlive. If your income planning includes blue chip stocks that pay dividends bear in mind that companies have and will change dividends in response to economic times. Additionally, blue chip stocks sometimes lose their luster; thus, this strategy involves market risks. You might opt for fixed-income places like bonds but all bonds, even U.S. Treasury, have interest rate risks and many, including municipal and corporate bonds, also have default risks. Many retirees are advised to use a structured withdrawal plan whereby they will use a given percent of their retirement money each year by converting assets to income. The risk here is that market losses mean disproportionately more assets must be converted to maintain the needed retirement income and this leads to running out of assets to convert. An emerging strategy is to shift the risk of living too long to an insurance company by using some of your retirement money to “lock in” a guaranteed lifetime income that’s received regardless of what happens to markets, interest rates or the economy. Such a lifetime income is possible with an annuity that has a feature called a Guaranteed Lifetime Withdrawal Benefit.

No doubt inflation and taxes will have a bearing on the quality of your retirement. There is little you can do about the former except possibly keep some of your late-in-retirement money in places that historically has kept pace with inflation. The danger is that risk is associated with places like real estate, stocks, mutual funds, etc. Accordingly, you could again end up with no income late in retirement, so be extremely careful when using the traditional assets that keep up with inflation. Taxes can be managed by diversifying your tax exposure, something that most people do not do. For example, if you can defer taxes on money you will not need until later you can smooth out the tax bite and even lower the taxes you will pay on Social Security benefits. Also, you can carefully convert qualified retirement money to Roth IRAs and lower your lifetime tax bill. If you want to defer taxes or convert to a Roth you’ll either need financial literacy or a good advisor – do not attempt without either.

Retirement is the time to minimize your risk of loss because you have no way to replace lost money. The immutable law of investing is that risk and reward travel together; thus, if the rate of return is above market so is the risk: there are no exceptions. The amount of risk you can afford is intertwined with your personal situation; therefore, what is appropriate for your neighbor may not be suitable for you. There is no easy path to financial literacy; however, you should commit to learn as much as you can, never put your money into something you do not understand and always make sure you evaluate the risk. The best way to do these is learn as much as you can on your own and then find a good financial advisor to provide the expertise you do not possess.

Shelby J. Smith, Ph.D.
January 2012

Steve Straseske, Financial & Insurance Services

Steve Straseske
2201 Double Creek Dr.
#5005
Round Rock, TX 78664

The current market outlook is far from clear. America is suffering a continuing economic malaise with unemployment alarmingly high. Deficit spending is out of control and Congress is hopelessly deadlocked over what to do. There will likely be no long-term solution without responsible fiscal policy that addresses Social Security, Medicare and defense major tax increases. The Democrats refuse to talk about cutting government spending and the Republicans are dead set against higher taxes. Federal elections are a year away and so are economic solutions given the current Congressional stalemate.

The new book Boomerang by Michael Lewis analyzes the deplorable financial condition of several European countries and California – concluding that all are on the brink of financial Armageddon. Global economic stagnation and the fiscal imbalance of many U.S. states & municipalities augurs poorly for an economic recovery near-term. Meanwhile homes continue to lose value in many communities, unemployment is stuck on high, the business sector is hunkered down, local & state governments are nearing panic, the banking industry is sick and Congress is adding to the economic damage.

Given the foregoing it’s hard to be optimistic about an improving market. Yet, many retirees are hoping and praying their investments will get back to breakeven so they can sell and put market risks behind them. Of course, there is no assurance the market will recover past losses nor is there a guarantee against another meltdown. Nonetheless, Wall Street continues to broadcast its favorite myth: “don’t worry about short-term market changes you’ll be fine in the long run”. Really! While the market has seen record peaks and valleys in the past decade, today’s level is roughly the same as a decade ago. Parenthetically, a decade is about half of the typical retirement. If the U.S. is today where Japan was in 1990, the market is in for a long slide to one-fourth its current level.

If you cannot afford the risk of the market, there is never a good time to “get in” nor is there a good time to “get out”. If you’re at risk of losing what you’ve saved to support you and your loved ones in retirement, now is a good time to measure your market risk. My advice: first, find a financial advisor that offers something other than market options and second, make doubly sure you understand the downside of his or her recommendations. You should never take risks with retirement money you cannot afford to lose. Retirement is the longest & most expensive journey you’ll ever take, you can’t borrow money to pay for it and you’ll have one chance to get it right; therefore, proceed cautiously and prepare accurately by working with a professional advisor.

Shelby J. Smith, Ph.D.
December 2011

Let me introduce you to a safe money option that could be suitable for some of your retirement money: fixed index-linked annuities or just FIAs. FIAs are available from insurance companies that guarantee them with their financial strength. Insurance companies have never let us down in protecting our homes, cars, health, life, business and more, nor have they on FIAs. The aging of America, fueled by 78 million baby boomers, has given rise to a new type of risk that insurers are willing to assume: the risk of living too long, i.e., longevity risk. How do FIAs work?

With an FIA your money IS NOT invested in the stock market; thus, there is no market risk or uncertainty. The interest you’ll earn is determined by a market index and if the index rises you’ll get some of the gain but none of the loss if the market falls. The cost of “no downside” is not getting all the “upside”. This gives you the potential to realize above market earnings. FIAs will not make you rich nor will you lose money as you can by guessing wrong in the market. FIAs are best for your “later in retirement” money. If you’re earning a pittance at your bank, or risking your retirement in the market, you should learn how FIAs can be a great place for some of your retirement money.

FIA earnings are not taxed until actually withdrawn, just like an IRA or 401(k). This permits you to pay income taxes when you want rather than the IRS deciding when you must. Also, you have limited or full access to your money via free withdrawals annually and generally the full amount if confined to a nursing home or diagnosed with a terminal illness. Your FIA passes directly to your named beneficiary without probate hassles if you don’t use it for your retirement or to cover an emergency. But the best part is that you can convert your FIA into a lifetime of guaranteed income that you cannot outlive.

Many FIAs guarantee you 7% or more earnings annually IF you later select the guaranteed lifetime income option. This allows you to know today the exact minimum amount of guaranteed lifetime income you’ll have when you start taking it – no guess work, no market ups and downs and no risk of loss. Is the FIA safe? No one has ever lost money in an FIA UNLESS they withdrew their money early. All your worldly valuables are protected by insurance companies and you’ve not lost sleep worrying; thus, why not plan to find out more about FIAs to determine if your retirement peace of mind will benefit? FIAs can change your “hope so money” into “know so money”. Talk to your financial advisor today to see if FIAs can add security to your retirement years.

Shelby J. Smith, Ph.D.
November 2011

Your retirement plan is only as good as your answers to the following three questions:

How long will you live?
How will your investments and savings perform?
How much money is needed to support the retirement you’ve planned?

The problem is, neither you nor anyone else can answer these questions and therein lies the problem with retirement planning. What can you do? Since we cannot know exactly what will happen, planning for minimum risks and certainty is a good second best.

The danger in “how long will you live” is “you might outlive your money”. We call this longevity risk and you can buy insurance to cover it. The solution is simple: purchase an insurance policy that will pay you a guaranteed lifetime income (and also your spouse if you elect) regardless of how long you live. How much will this cost? The cost depends on how much income you want and your current age. The insurance is embedded in an annuity with a guaranteed lifetime income feature – providing an income you cannot outlive plus giving you maximum flexibility for other unknowns. So rather than guessing “how long you’ll live” ask “how much will it cost to guarantee a lifetime income that seems reasonable for my retirement plans”? Your financial advisor can help.

How much will your savings and investments earn or lose in the coming years? Again, no one knows because markets and interest rates cannot be predicted. If you put your money at risk and guess wrong, you could be “locking in” your greatest fear: running out of money before you run out of time. The same annuity that guarantees you a lifetime income also guarantees you positive earnings until your lifetime income starts. Your money is always safe. You can even link annual interest rates to market indexes that provide above-market potential in good markets and zero losses in down markets. Ask your financial advisor about index-linked annuities with lifetime income guarantees.

How much you’ll need for retirement is a function of many things: plans, health, inflation, taxes, Social Security, retirement income and much more. It is prudent to address the first two questions first because “how much” will be partially determined by them. If you have money left after locking up an income for life, set up a reserve for emergencies, higher inflation & taxes and “bucket list” experiences. Don’t make retirement complicated by worrying about risky investments and uncertainty. The “annuity solution” delivers certainty, predictability and peace of mind. The worry free solution is to call your financial advisor to discuss the suitability of an annuity for some of your retirement money. Otherwise, answer the three unanswerable questions.
Shelby J. Smith, Ph.D.
October 2011

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 stocks, 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 alternatives 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 your money tax-free 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 doubly sure that 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 lumpsum 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 analyses. When you leave an employer and become an ex-employee – for whatever reason – always take your retirement money with you.