“The Future Depends on What You Do Today”- Mahatma Gandhi

100-candlesNo one has a crystal ball.  If we did, we might ask three important questions:

-How long will I live?

-Will I have enough money if I live to age 100?

-How will I spend the time I have on this earth?

As wealth managers dedicated to increasing families’ wealth and legacies, we consider these questions and the related answers as extremely important.

We Americans are living longer.  From 1980 to 2020, the number of Americans 90 years of age and older tripled to 1.9 million. And, by 2050, it is expected there will be 8 million 90 and over.  This is a new paradigm.  Historically, people retired in their 50s and early 60s and lived their last few years retired in comfort during the “golden years”.   These days, someone retiring in their early 60s could live 30 or 40 more years.  If so, will they have enough money and what will they do for that time period (perhaps 1/3 or more of their lifetime on earth)?

Life Expectancy. There are some good tools to help you estimate when your “plan will end.”  Here are three: https://www.livingto100.com/, https://www.bluezones.com/ (click on tools), and https://www.myabaris.com/tools/life-expectancy-calculator-how-long-will-i-live/, (Note: each site will require you entering your email address) These tools can take 5-10 minutes.  All look at personal health, family history and socioeconomic status.

Will My Nest Egg Hold Out?  Next, it’s time to calculate your expected “financial independence” date.  See our blog of April 21, 2015 http://www.dwmgmt.com/plan-for-financial-independence-not-retirement/  This is the date at which you have enough assets for the rest of your life without needing to work for money.  Recently this “independence” date has been extended for many due to three principal factors; increased expected longevity, lower expected returns, and reductions in and uncertainty about pensions and social security. The financial independence calculation requires a review and monitoring of key current and expected metrics: assets, additions to assets, longevity, retirement income, inflation, investment returns, tax rates, and spending goals.  Of course, all results must be stress tested and regularly monitored and revised as appropriate.

Meaning, Identity and Purpose in Remaining Years.  Planning for the “golden years” goes well beyond money.   Happiness, of course, is more than that.  We discussed it in our September 9th blog http://www.dwmgmt.com/how-would-you-rate-your-life/.  We ask our clients not only about their financial priorities, but also about their visions for their family, career, health, dreams, legacy, education and charity.

These days, more and more seniors are taking inventory on who they are, their accumulated skills and experience and want to stay engaged in the broader society and economy, continuing to be useful, active and “keep going”.  Here are some recent inspiring examples in the news:

  • Gerry Marzorati, former editor of the New York Times and author of the new book “Late to the Ball” has immersed himself in tennis since taking it up in his mid-50s. Mr. Marzorati recognizes that “Sixty is not the new 40. Fifty isn’t either.  Your lung capacity in late middle-age is in steady decline as are your fast-twitch muscle fibers that provide power and speed. Your sight, senses and balances are getting worse.”  Yet, undaunted, Mr. Marzorati concluded that for him, his “golden years” would be spent on “finding something new, something difficult- to immerse yourself in and improve at.”  He threw himself into his new passion, hiring a coach, practicing for hours and hours and even entering competitions in his new love.  No trophies yet, but fulfillment.
  • Alan Page, the leader of Vikings’ Purple People Eaters, is about to start his third career at age 70.  After his Hall of Fame NFL career, Mr. Page finished law school and became a Justice in the Minnesota State Supreme Court for 24 years until recent mandatory retirement.  Now he and his wife will commit their full-time efforts to their Page Foundation, focused on educating young children, through money and mentoring.
  • At 100, Ida Keeling is still running for her life. She has the fastest time for American women aged 95-99 in the 60-meter “dash” at 29.86 seconds.  She is 4’6” and weighs 83 pounds.  She said she was fast as a girl, though back then there were few opportunities for girls.  What makes her faster now is that “everyone has slowed down.”  She became a single parent of four when her husband died at age 42.  Ms. Keeling’s daughter, Shelley, herself a track coach, got Ida back into running when Mom was 67.  Her one hour of daily running gives Ms. Keeling a sense of serenity: “Time marches on, but I keep going.”

Go ahead.  Take the test!  See how long you will be at life’s party.   Then, by yourself, or with help from a wealth manager like DWM, develop, monitor and maintain a financial, personal and family plan for the future that meets your priorities and visions. The future depends on what you do today.  Go for it!

MGP 4 – The Next Generation of Financial Planning

MGP logo onlyThe financial industry is seeing some interesting changes spurred by the recently-enacted DOL fiduciary rule (see our recent blog at http://www.dwmgmt.com/fiduciary-standard-closing-in-on-reps-and-brokers/ ). At DWM, we welcome these changes as it now requires financial advisors to adhere to a rule that we have been following from the beginning…which is to make investment and planning recommendations with the client’s best interests in mind.  We always put the client first and always remain committed to this philosophy.


Last week, MoneyGuidePro, our chosen software provider, came out with a new version of their financial planning tool called MGP 4.  It is the next generation of financial planning software and the updates are specifically intended to help the financial advisor stay in line with the new rules.  The changes have made the software more “conversational” so advisor and client can spend more time discussing goals and retirement requirements, something we have always focused on.  We have spent some time reviewing the new features and there is a small learning curve with it.  We do think in the long run, it’s a nice update.  If you have recently logged on and were surprised or frustrated with it, you are not alone.  We want to describe some of the basics to you and, of course, we are always available for questions.


The biggest change is in the presentation and some of the familiar indexes are set up in new locations.  The updated format takes you to a My Plans landing page where you will have access to your financial plan.  Once the plan is selected, you will be on the page with personal information, similar to the previous version.  If you look at the top of this page, there is a progression line with three circles on it. The circle on the left is marked “About You” and is green at this stage. Once you click on the circle, the dropdown has all the items from the previous version grouped in four categories- Personal, Goals, Money and Risk and Allocation.  Click on each of these for details. ‘Personal’ shows personal information and has a new area for expectations and concerns.  ‘Goals’ has a retirement schedule and a place to include your goals, including one for health care, a newly-established feature to help us understand and track the costs that health care may have on your financial plan.  When you click on ‘Money’, you will see the familiar drop-down categories from the old version – including investments, retirement income and net worth.  Finally the ‘Risk and Allocation’ section will help us evaluate your risk tolerance and allocation strategy so we can see if they are in line with your goals.  You can always skip a category by returning to the “progression line” at the top and selecting your choice.   Everything is here, it just may take an extra step to get there.


*Tech Tip:  If you want to have an abbreviated look at your plan, you can select the ‘My Snapshot’ tab on the first page to have quick access to some of the most popular features like net worth, goals and results.


Once you finish ‘Risk & Allocation’, you are ready to move to the ‘Results’ circle.  You’ve seen these headings before. We suggest you click on ‘recommended scenario’.  Once on that page, look at the left side and you’ll see blue rectangles with personalized strategy tabs based on your goals.  One new, exciting feature is the Social Security tab which allows you to calculate your best strategy drawing benefits, if you haven’t already begun.  You can also choose the “What if Worksheet”. Here is where we modify certain predictors for the future like rates of return, inflation or living longer.  You can look under the recommended scenario or under the ‘What if worksheet’ Monte Carlo simulation graphs and you will see the blue rectangle “explore”.  Click on explore and then scroll down to “combined details.”    You’re now into the results page and graph, which all of our clients have seen before and shows the annual and linear progression of the value of your future portfolio.  This chart starts with the current value of your investment portfolio and shows how the additions, earnings, taxes and spending or goals might impact it going forward.  You can follow it to the wonderfully euphemized “end of your plan”!  We always find that amusing…


There are many other features hidden in this financial planning software and we invite you to “play” with this program any time. There is something for everyone in here.  In the play zone, you can add any number of crazy or exciting goals to see if you can make them come true.  Or if you want to prepare for the worst, you can stress test for challenges in the “what are you afraid of” feature. There are strategy tools, a budget feature and you can print your net worth report anytime. The ‘Finish’ tab includes the reports area which is not as intuitive as before, so if you have questions, please call us.  We are always glad to help…or run them for you!  And don’t worry, when you are finished playing with your plan, we always keep the original copy that is our constant.  DWM wants you to understand and participate in your financial planning and be as educated and knowledgeable as possible.  After all, that is our fiduciary responsibility and we always put our clients first!

How the New Changes to Social Security May Affect You

How-Social-Security-Works-cartoonPresident Barack Obama signed the Bipartisan Budget Act of 2015 into law on November 2, 2015. The budget provides relief for sequester cuts and allows for increased investments to support economic growth and build a strong middle-class for the next two years. To offset the cost of additional discretionary spending, the budget had to make cuts or changes to certain programs, including the Social Security program. The adjustments to Social Security will eliminate the file and suspend and restricted application strategies that helped some couples increase their lifetime Social Security benefits.

The new Social Security laws will take effect May 1, 2016. For those individuals currently using the file and suspend or restricted application strategies, they will not be affected by the rule changes. In addition, those individuals that turn age 66 before April 30, 2016 may elect to use the file and suspend strategy, if completed before May 1, 2016. The restricted application strategy will be available for those individuals that turned age 62 by December 31, 2015.

The file and suspend strategy allowed for one spouse, who reached their full retirement age, to file for and immediately suspend his or her benefits. By doing so, the second spouse would be allowed to start receiving a spousal benefit. The suspended benefits of the first spouse would then accrue delayed retirement credits at 8% a year. Under the new rules, if an individual decides to suspend his or her benefits, all benefits payable on his or her earnings record to other individuals will be suspended as well.

The restricted application strategy was often used in conjunction with the file and suspend strategy. By filing a restricted application, a person could apply for just a spousal benefit while his or her benefits accrued delayed retirement credits. Under the new rules, filing for a spousal benefit will trigger a person’s own retirement benefit. The Social Security Administration will pay only the greater of the spousal benefit or a person’s own benefit.

These two strategies were actually unintended loopholes that extended from the “voluntary suspension” concept introduced by the Senior Citizen Freedom to Work Act of 2000. The idea was originally intended to allow seniors that had mistakenly applied to receive their benefits early, stop their payments and earn delayed retirement credits. This allowed for these seniors to continue working, or even rejoin the workforce, without the risk of reducing or eliminating their social security benefit. The Social Security Administration will reduce a person’s annual benefit, if under the full retirement age, by $1 for every $2 made over a certain dollar threshold ($15,720 for 2016). Earned income includes W-2 wages and net earnings if self-employed. It does not include pensions, annuities, investment income, interest, or government or military retirement benefits.

It’s important to note that even if you missed out on using one of these strategies, you still may receive your maximum benefit. According to an analysis done by Social Security Choices, a software company that helps individuals optimize Social Security strategies, only about 18% of the cases analyzed showed it was beneficial to use the file and suspend and restricted application strategies. In addition, if these strategies were implemented, it could take as many as 12 years until a cumulative benefit was received.

With Social Security benefits playing a large part in calculating financial independence, DWM has researched the new adjustments to better understand how our clients will be affected. Although the new laws will limit the amount of planning available, we will continue to analyze each client’s Social Security situations in an effort to maximize their benefits, as there are still options and strategies available.

Furthermore, any quantitative analysis is complicated by the risk that there will be future changes to Social Security, which could include “means testing”.   Individuals, whose retirement incomes exceed established thresholds, could have their future benefits reduced or eliminated. We anticipate that maximizing Social Security strategies will continue to be a moving target. We look forward to working with each of our clients as they approach “retirement age”.

Is the 4% Withdrawal “Rule” Reliable?

DiceRules of thumb can be great, except when they don’t work. Take the 4% withdrawal rate rule, for example.

This rule, developed twenty years ago, is used to forecast how much people can spend annually in retirement without running out of money. Let’s say a couple has $1,000,000 and has just retired. The rule says if they spend $40,000 (4%) from the portfolio and increase this annual withdrawal by the inflation rate, their $1 million nest egg should last for the rest of their lives.

Historically, an average annual return on a balanced allocation strategy portfolio was roughly 7% from 1970 until 2014, while annual inflation was 4%. Hence, a real return of 3%. The conditions during those four decades are different from today. The decades of the ’80s and ’90s produced average equity returns close to 20% per year. The bond bull market produced returns of almost 9% per year for the last three decades. During this time, the “rule” could have worked fairly well for some people. Today, however, there are a number of problems with this rule.

First, inflation forecasted returns and longevity have changed greatly. Inflation has been negative over the last twelve months and has averaged less than 1% per year over the last three years. Forecasted returns, of course, vary widely and no one can predict the future. A conservative estimate might be a 2% real return (3% nominal less 1% inflation, or 5% nominal less 3% inflation). Longevity is increasing. Hence, for many people, their calculations should be based on an eventual age of 100.

In an article from this past Sunday’s NYT, Professor Wade Pfau at the American College of Financial Services put it this way: “Because interest rates are so low now, while stock markets are also very highly valued, we are in unchartered waters in terms of the conditions at the start of retirement and knowing whether the 4 percent rule can work in those cases.”

Second, the 4% rule never took into account non-linear spending patterns of retirees, other goals, other retirement resources, asset allocation, taxes and stress testing the plan.

There’s a much better way to do this, though it takes more thought and time and a disciplined process. For those who value their financial future, it’s worth the effort. Here are some of the elements that you need consider:

Start with your goals. At what age do you want to achieve financial independence (freedom to retire)? What will be your likely spending patterns during retirement? What will your housing be? What will be your likely health care costs? Are there any other needs, wants or wishes you have for the future?

Retirement resources. The calculation needs to include not only the investment portfolio, but also other income sources, such as social security, pension, rental income or part-time work. The calculation also needs to review all assets, not simply the investment portfolio, and determine the amount, if any, of proceeds from the sale of those assets that could be used in the future to fund goals.

Asset allocation. Varying allocations will likely produce varying results of returns and volatility. The plan should be calculated using the appropriate allocation strategy. Returns should be calculated in two ways- historical and forecasted.

Taxes. Income taxes can have a huge impact on a plan. Allocation of investments into appropriate (taxable, qualified, Roth) accounts can make a real difference. Tax-efficiency throughout the plan is imperative.

Stress Testing. The calculations need to be done using a “stochastic” process such as Monte Carlo simulation rather than a linear one. A Monte Carlo simulation is a tool for estimating probability distributions of potential results by allowing for random variations over time. The world does not operate in a straight line and linear projections can be greatly upset (and therefore of little value) when outliers come into play. In addition, stress testing involves looking at the potential impact of negative factors in the future, including living longer, social security cuts, lower than expected investment returns, and/or large health care costs.

In short, the old 4% withdrawal rule is not a good way to predict whether or not you will fulfill the goals you have for you and your family. However, there is a process that can provide reasonable assurance and one you should expect from your wealth manager, like DWM, as part of their package of services for you. It can be a little complicated but should be customized for your particular situation. It will take some time and effort. It requires discipline and monitoring. However, if you value your financial future, it’s well worth the effort.

Plan For Financial Independence, Not Retirement

drseussWhen the Social Security program was started in 1935, the average life expectancy was 61 years old. Today, life expectancy is around 80, with more and more people living into their 90s and beyond. Yet, much of society continues to expect people to stop working in their early to mid 60s and retire, because giving up work is “simply what most people do.”

Yet, times are changing. People are working longer. And it’s not about economic distress. The WSJ recently reported that this trend is being driven by many highly educated workers in professional-services jobs who are sticking around by choice, doing something they love to do. Dr. Jan Abushakrah, 69, typically works 60 hour weeks as chairwoman of the gerontology department at Portland (OR) Community College. Retirement isn’t on her agenda. She says “As long as I am healthy and happy every morning when I wake up and have something exciting on my plate to look forward to, it is easy to say I could keep doing this forever.” Personally, I feel the same way. Helping people is a great way to spend your time.

Money isn’t the main factor that people keep working in later years. 67% do it because they want to stay active and involved. 51% enjoy working. 50% want to keep health insurance and other benefits. 47% need money to make ends meet. 38% want money to buy extras. 15% try a new career.

We have our clients target their “financial independence” date rather than their retirement date for planning. This is the date at which you have enough assets for the rest of your life without needing to work for money. The beauty is that once you reach this point, you keep working only if you want to. For those that have a vocation- a higher calling, rather than a job, and are making an impact, continuing to work is a likely possibility.

As someone approaches financial independence and can afford to stop working, they need to ask themselves a series of hard questions starting with “What would I do if I didn’t have to go to work today?” Certainly, there are physical activities, grandchildren, travel, education, charities and lots of other options. What combination produces a “series of successful days” that becomes a successful life? With financial independence, there are thousands of choices. You can make your own “cocktail” of choices every day.

Of course, it is important for spouses to work on these planning issues together. As financial independence approaches, both spouses should create an individual vision of what each wants to achieve in the next phase of life and then compare notes. Sometimes you have a situation where one person in the couple loves their job and the other only likes theirs. That’s a big difference. Communication, compromise and negotiation is key.

At the same time, older Americans are exercising more, which keeps them young. A recent study showed that how we age physically is, to a large degree, up to us. A recent study of recreational cyclists aged 55-79 by King’s College in London showed that on almost all measures, their physical functioning remained fairly stable across decades and was much closer to that of young adults than of people their own age. As a group, even the oldest cyclists had younger people’s levels of balance, reflexes, metabolic health and memory ability. However, the study showed that endurance and strength does decrease to some extent over time. All in all, though, aging is simply different for active people. On a personal note, for those of you who know I annually run the 10k Cooper River Bridge run here in Charleston, I am happy to report that due to some extra training and use of a coach, I was able to run my best time in 7 years last month. Not sure if I can turn back the hands of time, but maybe at least slow them down a little.

With Americans living longer, we suggest you focus on financial independence rather than retirement. At that point, you’re in control. You can determine what every day’s activities will be- hopefully, all things you want to do. You hold the keys to your future. As Dr. Seuss would say: “Oh, the Places You’ll Go.”

So Many Numbers: Which Ones Are Important?

stock-photo-old-typeset-166120136Our world is full of numbers. They’re everywhere. Our calendars just moved from 2014 to 2015. We get bombarded continually with numbers representing time, temperature, and, yes, stock market reports. NPR’s Eric Westervelt last week called numbers “the scaffolding that our economy, our technology and huge parts of our life are built on.”

For this blog, I thought it would be interesting to look at the origin of our numbers and then highlight five key numbers that are of real importance to your financial future.

Mr. Westervelt was interviewing Amir Aczel who has written a new book “Finding Zero: A Mathematician’s Odyssey to Uncover the Origins of Numbers.” Mr. Aczel believes the invention or discovery of numbers “is the greatest intellectual invention of the human mind.” We use Hindu-Arabic numerals. Before that, there were many other systems including the Mayans, the Babylonians, and, yes, the Romans. The big problem with the Roman number system is that it had no zero. The numbers didn’t cycle and hence multiplication or division was almost impossible. Five (V) times ten (X) is 50 or L in the Roman system. Each value was unique in the Roman system whereas in our system, numbers can cycle. Two with a zero after it is 20. And, zero is very important. Without it, numbers couldn’t cycle. It’s the reason that 9 numbers plus a zero allow us to write any number we want. Pretty amazing.

stock-photo-old-typeset-166120136Our world is full of numbers. They’re everywhere. Our calendars just moved from 2014 to 2015. We get bombarded continually with numbers representing time, temperature, and, yes, stock market reports. NPR’s Eric Westervelt last week called numbers “the scaffolding that our economy, our technology and huge parts of our life are built on.”

For this blog, I thought it would be interesting to look at the origin of our numbers and then highlight five key numbers that are of real importance to your financial future.

Mr. Westervelt was interviewing Amir Aczel who has written a new book “Finding Zero: A Mathematician’s Odyssey to Uncover the Origins of Numbers.” Mr. Aczel believes the invention or discovery of numbers “is the greatest intellectual invention of the human mind.” We use Hindu-Arabic numerals. Before that, there were many other systems including the Mayans, the Babylonians, and, yes, the Romans. The big problem with the Roman number system is that it had no zero. The numbers didn’t cycle and hence multiplication or division was almost impossible. Five (V) times ten (X) is 50 or L in the Roman system. Each value was unique in the Roman system whereas in our system, numbers can cycle. Two with a zero after it is 20. And, zero is very important. Without it, numbers couldn’t cycle. It’s the reason that 9 numbers plus a zero allow us to write any number we want. Pretty amazing.

Now, knowing a little more about our number system and with numbers seemingly everywhere, where do we focus our attention? Here are five key numbers that have a big impact on your ability to meet your financial goals:

Percentage of your paycheck that goes to savings/investments. This may be the most important decision in your life. By saving early, you can have a portion of earnings grow in a compound fashion for decades. Furthermore, by “paying yourself” off the top, you limit the amount available for everyday living expenses during your working years. This discipline helps you in two major ways to obtaining early financial independence- first, by creating the fund for “retirement” and second, by reducing the expenses you will likely have during “retirement.” BTW- there is no magic percentage. Everyone’s circumstances are different. Consider an amount of 10-20% of your gross pay.

Your Annual Living Expenses. Monitor your expenses for last year and group them in three categories- needs, wants and wishes. Review the data from a long-term perspective. Spending a considerable amount now on wants and wishes will obviously reduce the amount available in future years. It’s all about choices and accountability. For the most part, you alone can determine and control your level of expenses.

The Asset Allocation of Your Portfolio. This is one of your most important investment decisions. Based upon your risk profile you need to determine how best to split up your investment funds between stocks, bonds and alternatives (which can include real estate). Studies show that 90% of your investment returns are the result of your asset allocation.

The Net Returns on Your Portfolio. Research shows that fees really matter. A $1,000,000 portfolio that earns 5% net per year will grow to $4.3 million in 30 years. The same portfolio that earns 4% net per year will grow to $3.2MM. The difference is $1.1 million- a 26% reduction. Over long periods, loads, commissions, high operating expenses and management fees can be a significant drag on wealth creation. Low cost passive investments are best for stocks and bonds. Make sure you understand and monitor all fees charged to your portfolio. Make sure you are getting real value for all the fees. And certainly, know what your net returns have been, are expected to be and how they compare to the appropriate benchmarks.

Your Effective (average) and Marginal Tax Rate. Tax costs on earnings, investment returns and other income can be huge, particularly as a result of the increases caused by the Affordable Care Act. You and your advisors should know your tax rates and use them as a key factor in decision making and investment strategy. Furthermore, proactive planning designed to minimize taxes is a must for you and your advisors.

Over the last 45 years, I have worked with clients of all ages, income levels and circumstances. A common thread among those who have achieved or are achieving their financial goals is that they all knew of and monitored these five key numbers regularly, making adjustments as appropriate. And, of course, they use objective, proactive, value driven advisors like DWM to help them as well.

Why not make it a New Year’s Resolution to know and monitor these five key numbers for your financial future? It could change your life.

Retirement Planning Rules of Thumb are Likely Off-Target

retirementnumbersWhat’s your “Number”? You know, that elusive amount of investment assets you need when you stop working so that you don’t run out of money in retirement.

Barron’s ran a series of articles Saturday on retirement which included rules of thumb for calculating your number. “Conventional wisdom” would have you take 75% of your annual working income, subtract your social security and pensions expected in retirement and then multiply the result by 25 to get “your number.”

Here’s a simple example. Household income of $120,000. Social security expected to be $30,000, no pension. 75% of income is $90,000. Subtract $30,000. The result is $60,000. Multiply by 25 and the number today is $1,500,000. It will keep increasing with inflation. Easy calculation. But likely off-target. Here’s why:

First, using 75% of your current income as your expense level for all of retirement could be way off. You may have mortgage payments that will exist for only a few more years into retirement. You might still have children at home at retirement time for which education costs will be incurred. And, at some point, the kids might leave home and reduce your expenses. You might currently only be spending half your paycheck and investing the rest. For business owners and salesman, expenses in retirement could be higher because previously company-provided benefits now have to be paid personally.

Also, expenses in retirement change over the years. Typically spending declines when folks reach their late 70s or early 80s. And, then with medical costs, expenses could ramp up significantly if people live into their 90s. Furthermore, a married couple will likely not die on the same day, particularly if there is an age difference. Expenses of one person for part of the retirement period will typically be less than expenses for two people.

Second, the use of multiplier of 25 is based on a “safe withdrawal rate” of 4% each year. The concept is that since expenses will increase with inflation, if the portfolio earns 7% and you withdraw 4% the first year, then your principal grows 3% which means you can draw 3% more in year two (due to inflation) without breaking the bank. Furthermore, this 4% number is an after-tax amount. So, for example, if the funds you accumulate are all traditional 401(k)/IRA funds, then every retirement withdrawal will be subject to income tax. If we assume a 25% income tax rate, your withdrawal rate just went down to 3% and your multiplier just went up to 33.33.

Third, you may have other assets that should be included, for example if you have equity in your house. At some point, your house could be sold, downsized or you could consider a reverse mortgage. In each cases, these funds would reduce your “number”.

Here’s a better way to do retirement planning:

  1. Instead of using income, use your actual expenses as a starting point. On the first day of retirement, what will your expenses likely be? If some expenses will drop off in a few years, put those in a separate column. If you have wants and wishes in retirement, for example travel or a second house, show those separately for each item, number of years of payments, etc.
  2. Using actuarial tables modified by family and personal longevity likelihood, calculate the number of years you (and your spouse) will likely live.
  3. Identify before retirement what your annual additions to your investment portfolio will likely be and separate it between qualified plans and taxable amounts.
  4. Review your risk profile and determine your likely asset allocation while you are working and after retirement.
  5. Prepare a year by year analysis of your financial retirement plan, while you are working and during retirement. For each year, this will show the beginning investment portfolio, investment additions, post retirement income, investment earnings, income taxes, expenses during retirement and ending portfolio value. And, of course, inflation needs to be incorporated into the calculation as well.
  6. Then use a Monte Carlo or similar simulation. It incorporates all of your data in a random order to account for the uncertainty and performance variation and produces thousands of scenarios of possible outcomes. The result- the likelihood of “success”, i.e. having enough money for your lifetime.
  7. Stress test your plan for such items as early death or disability, social security being reduced or eliminated, long-term care costs, etc.
  8. Regularly (at least annually) review the above assumptions and see if you are still on plan or if revisions are necessary.

I’m sure that the above seems overwhelming. It doesn’t need to be. There is good software available to help in the calculation and illustration of the above. We use MoneyGuidePro and, of course, we expedite the process of our clients. If you’re not working with us, you might attempt to do this calculation on your own.

It will take more time than the simple calculation that some use to find their “number.” However, it certainly will provide a more accurate target for you for the future and give you greater peace of mind about your finances. After four decades of doing this for clients, I can assure you that the process is well worth the investment.

Obama’s MyRA: A Short Recap

myRAIn his recent State of the Union speech, President Obama introduced a new program of retirement saving for the 50% of Americans that do not currently have employer-funded retirement plans. This MyRA, as it is called for “My IRA”, allows workers to contribute up to $15,000 in a starter-saving plan that exclusively uses government Treasury Bonds. The accounts offer guaranteed principal, tax-free withdrawals of principal and no fees. Couples with an adjusted income of $191,000 or less and individuals with $129,000 or less may contribute after-tax a maximum per-year of $5,500 or $6,500, if older than 50. Once the account reaches $15,000, principal can be transferred to a traditional IRA or withdrawn without penalty for other uses. Any growth earned in the account will face a 10% withdrawal penalty if taken before age 59.5. Self-employed workers are not candidates for these accounts.

As a way to encourage saving for those workers who currently are not offered another vehicle, the rates of return on the bonds are running at an average of 3.6%, which is superior to standard bank savings accounts or CD’s. Other incentives for using the MyRA as a short-term saving plan include the fact that the principal is guaranteed, there are no fees and no withdrawal penalties on principal. This could  encourage workers to get in the habit of automatically deducting contributions directly from a paycheck for savings or used as a potential way to accrue a home down-payment or emergency fund. It requires little to get started – $25 initial minimum, and then allows deductions of as little as $5 per paycheck. Also, because the Treasury Bonds are the only investment, there is no education or decision-making required. Workers can easily transfer their account from employer to employer, either for full-time or part-time jobs.

The detractors maintain that this is simply a new market for buying Government bonds to fund overspending and to unload the Treasury Bonds purchased under the Obama administration’s recent policy of “quantitative easing”,  where the Fed  has purchased large amounts of Treasury bonds to help contain interest rates and encourage growth. Also, rising interest rates would have a major negative effect on the value of 30 year bonds. Others point out that this program is inadequate to overcome the estimated $6-8 trillion in retirement saving shortfalls and that concentration should instead be on fixing Social Security. There are no tax deductions for these contributions and the government gets to use your money and keep it from being invested in higher-earning choices. Also, employers are not required to offer this plan and it is unclear how the program will launch at its predicted start-date at the end of 2014.

There appear to be some benefits to using this as a short-term savings plan and it may act as an incentive to encourage personal savings, but it falls far short of the intended fix for under-funded retirement accounts and is an unlikely fit for most DWM clients. It provides little tax benefits and the only investment option, long-term treasury bonds, is not a good one. Further, it can certainly be argued that the spotlight should be on fixing the other government-sponsored and non-voluntary retirement savings program – Social Security.

Social Security: Show Me the Money!

showmethe money3Should you wait until age 70 to collect social security? Some say yes, I say no. I’ll take the money early.

Generally, the earliest you can collect social security is age 62. However, if you are making more than $15,120 per year, social security will withhold $1 of benefits for every $2 in earnings above the limit. In addition, there is a 25% reduction in benefits for taking them early. Current “full retirement age” is 66. You can also wait until age 70 to start collecting. Social Security provides a “guaranteed” 8% increase per year if you wait to age 70.

So, many financial advisers do a simple calculation and conclude that you should wait to age 70 and get a slightly larger monthly check. I believe they are missing four key factors in analyzing this important decision.

  • COLA.  Social security payments increase each year by a Cost of Living Adjustment (COLA). This amount was 1.7% for 2013 and will be 1.5% in 2014. Historically, COLA has been close to 3%.
  • Time value of money.  If I take the money early and spend it, that means I didn’t need to draw those funds from my investment accounts. Alternatively, I can invest it. Either way, the social security funds have a 5-8% annual return (economic) benefit to me.
  • Potential changes to social security.  The Social Security Disability Insurance Trust Fund will likely be exhausted in 2016. The Social Security retirement program reserves are expected to run out in 2033. One of these days, Congress may actually deal with the problem. Changes could include extending full retirement ages, cutting back on the COLA, means testing to eliminate/reduce payments to those with substantial income/assets or other methods to reduce future benefits.
  • We don’t know when we are going to die.  Social security stops when you die. However, spouses may be able to take over their deceased spouse’s benefits if they exceed their own.

Here’s an example on how this works and why I think it is worthwhile to take the money.  Let’s assume a person reaching full retirement age of 66 could receive $2,500 per month now. Alternatively, they could wait until age 70 and receive $3,400 per month then.  If they take the $2,500 per month at age 66, invest it at 5% and get a COLA adjustment of 3% each year, their monthly benefit when they reach 70 is $2,813.  In addition, they will have accumulated $136,000 in four years. Yes, if they waited four years, the monthly payment would be $587 more.  However, it will take another 24 years (age 94) before the person waiting until 70 will have as large a pot of money (or economic benefit) as the individual starting at age 66.

Secondly, there are going to be changes in social security. If they introduce means testing, many of us will have our social security benefits reduced or eliminated. Let’s take the money now. If they push out the “full retirement age” that could mean fewer years of payments. Furthermore, none of us knows our “eventual age”. Hence, while many of us hope and expect to live beyond age 94, there is no guarantee that we will. When we die, our benefits die as well.

We’ve done the same calculations for people who want to start collecting early, at age 62. Again, this doesn’t apply if you still have earned income above $15,120 per year. Similarly, taking benefits at age 62 instead of age 66 or 70 is likely advantageous. In addition, there are still some very nice strategies that couples can use to maximize their social security benefits and still start early. Of course, everyone’s situation is different and it is possible that delaying social security may, in some cases, be better. Working with sophisticated software programs such as www.maximizemysocialsecurity.com and an experienced financial adviser like DWM can be quite helpful in customizing this analysis for you.

Don’t delay collecting social security. The gravy train may be slowing down soon.