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The Key to Retirement Success – Online Class – Q&A

Key to Retirement Success - Recorded Video Class

Key to Retirement Success – Recorded Video Class

Sensible Money’s founder and MoneyOver55 Expert Dana Anspach hosted a live online retirement class in October. You can view the recorded version on YouTube at Key to Retirement Success.

Below are a collection of questions that were asked by attendees. Dana has provide a written answer to each question and when applicable provided links to additional articles and resources.

Questions and Answers

Question: My question is what is the best way to cover the “gap” if you retire early before you are eligible for access to Retirement accounts, pensions and social security? -Jonathan

  •  Answer: It all depends on your individual situation. If you are going to be in a low tax bracket during the gap years it may be best to take withdrawals from retirement accounts. If you have after-tax savings and investment (meaning not inside a retirement account of any kind) it may be best to use that – but if you will realize capital gains from spending this type of account down that has to be factored in. What we see most often is the income need in the gap years can vary from year to year depending on if pensions start mid-year or Social Security starts mid-year. If it was a nice even amount, like $30,000 a year for 5 years, and if you had cash sitting around, then a fixed immediate annuity would be an option.  In our process the way we cover the gap is we calculate the projected gap each year, determine what type of account it will likely come out of, and then buy a CD or bond that matures that year in that amount.

Question: Are 7- or 10-year fixed deferred indexed annuities with riders for lifetime income that includes spouse a good investment (ages 60 & 58)? -Susan

  • Answer: Without knowing your entire financial situation and income needs it is difficult to know what investment fit into your plan. Rather than thinking in terms of “good” I prefer to think of the different choices as tools. Then it is a matter of determining what job your money needs to do for you – and what tool is best suited to accomplish that.  You’ll find additional info related to your question in this article of mine When Are Annuities a Good Investment?

Question: What are other investments that are on the conservative side for retirement? We have money from 401(k) that we pulled out of the market and is currently held as IRA in cash basis. -Susan

  • Answer: Everyone defines “conservative” a bit differently. There is always a trade-off between safety of principal, current income, and potential for growth. If you want safety of principal and are willing to take less interest income and no potential for growth then check out the article 5 Safe Investments.

Question: What is your opinion on investing a bulk of your retirement savings in Treasury Inflation Protected Securities (TIPS) –T

  • Answer: For a higher income retiree I question the need for future income that keeps direct pace with inflation. Research shows that retirees may not need income that forever goes up at the same pace as inflation. However, if that is a primary concern, and safety of principal is a primary concern, and if you are talking about investment money that is all inside of retirement accounts like an IRA, then TIPS can be a good solution. TIPS are not very tax efficient so they may not be the best choice for investments that are not inside of a retirement account. Inside of a retirement account that won’t matter as all taxes are deferred and you only pay income tax as you take withdrawals.

Question:  In retirement how does a person learn to be a spender rather than a saver? -Lawrence

  • Answer: This is a great question. It is difficult for most retirees to spend their money, even when we tell them they can and that they are not at risk of running out. It helps to have a plan in place and to know that you have stress-tested it against various things like over-spending, higher inflation, low returns, etc. Then it can help to start by withdrawing a set monthly amount and have it direct deposited into your checking account. You are essentially giving yourself your retirement paycheck. As long as you are within the withdrawal amounts established by your plan, you should be fine.

Question: What is the key trigger to retire once you have reached your number, completed a plan, and formalized a post retirement spending budget? -Bob

  • Answer: If you have done all of that the key trigger is when you are ready! You’ll want to think about what you plan on doing with your time. Career-oriented “A types” and business owners often have trouble with traditional retirement. They have a need to feel like they are productively contributing to something. Others have no problem transitioning to more free time as they fill it with family time, hobbies and volunteer work that they have been wanting to do. If the financial are in order, this would be what to think about. I had one retiree who knew he could retire any time. He really liked his current manager and decided he would work until the next big reorganization. A few years later his manager was replaced and he retired as soon as that was announced.

Question: Can you give an example of a couple who saves taxes by paying at 15% rather than 25% – is this a Roth conversion? -Vincent

  • Answer: Suppose you are 62 and have not started Social Security. You are retired and are going to spend $50,000 from a CD that matures to use for your living expenses this year. You have enough other non-retirement savings to use to get you to age 70 when you plan to start Social Security and IRA withdrawals. You have almost no taxable income other than a bit of interest income from the CD. You have your standard deduction and exemptions to use on your tax return. Your tax rate for the year will be zero percent as you have more deductions than income. Now fast forward to your age 70. Suppose now you have $34,000 a year in Social Security income and a required $45,000 IRA withdrawal. You now have $89,000 of income. Even after deductions you still have about $75,000 of taxable income, putting you in the 25% tax bracket. You could have taken small IRA withdrawals between age 62 and 70 and paid taxes at a lower rate (10% or 15%). From age 70 on your income will now be high enough that all withdrawals will be taxed at 25% or higher. As a matter of fact you may have been able to withdraw about $150,000 over that 8 years – and paid tax at least a 10% lower rate than you will pay after age 70. That represents about $15,000 in tax savings.

Question: Explain using a 403b as a bridge when delaying social security -James

  • Answer: See question above. Basically you are choosing to withdraw money from retirement accounts (such as a 403b or 401k) to use for living expenses in early retirement while delaying Social Security so you can get your higher age 70 Social Security amount. For some people this approach has substantial benefits. For others, this approach may not be the best one. It all depends on your entire financial situation, other sources of income, age, taxes, etc.

Question: I need income from my portfolio and am a conservative investor.  What are some of your recommendations for getting income from a portfolio without taking on a lot of risk?  I am currently invested in four index funds; US total stock index, Total International stock index, US total bond index and Total International bond index.  –Unknown

  • Answer: There are three main approaches to generating income from a portfolio. They are the Total Return Approach with Systematic Withdrawals, an Interest Only approach, and a Time-Segmented Approach.  Typically with an index fund portfolio people use a total return approach with systematic withdrawals. I discuss these approaches and provide links to additional details in my article 5 Retirement  Income Portfolios.

Question: It seems inevitable that US interest rates will only go up in the future.  Assuming this is true, does it make any sense to keep funds in a bond mutual fund?  Does it make more sense to sell bond holdings now, put them in cash and then reinvest in bonds once rates have risen?

  • Answer: I agree it seems inevitable that US interest rates will rise. This has been the consensus since about 2009. If we had held money in cash this entire time, we’d still be waiting. I don’t think sitting in cash is the right thing to do. Our preference is to ladder individual bonds instead of using bond funds. With an individual bond I know what I’ll get when it matures – regardless of the movement of interest rates. When the bond matures if interest rates are higher at that time I can buy a new bond that is paying a higher coupon rate. In a bond fund, there is no option to hold the bond to maturity -  if interest rates go up, your share price will go down. It is better to put together an acceptable strategy that delivers a reasonable outcome regardless of the direction of interest rates – this will deliver far more certainty than an approach that only pays off if certain things happen within a certain time frame.

Question: If my tax bracket is the same pre and post retirement, are Roths the best way to leave money to my kids?  Should I convert my regular IRAs to Roths? -Boyce

  • Answer: If there is no meaningful difference in pre and post retirement tax brackets then the question to ask is “Do you want to pre-pay taxes for your children?”  A Roth is a great way to leave money for your kids. If that is a primary goal of yours there is nothing wrong with paying taxes today to convert money to a Roth. My article 5 Questions to Determine if a Roth Conversion is Right for You will provide additional information on this.

I retired at 55 in march 2011 and my CFP has had me in 100% index bond funds ever since….I don’t think about how much i lost out by not being in stocks…but I trust my advisor…trying to keep a positive attitude for a long term plan till I’m 95 will work out. -Donald

  • Answer: There is nothing wrong with choosing a conservative approach. Every choice has trade-offs. When you choose a very safe approach you will miss out on gains. If you choose an approach that has the potential for higher returns it will come with more volatility.  The important thing is not to change approaches every few years! Pick a disciplined time-tested approach and stick with it.

The majority of my assets are in 401k, for at least the next 5 years until retirement.  Would your plan included a recommendation on how to allocate that money until I retire? As a follow-up to my previous question, would you make a recommendation on whether I should switch to roth 401k for the next 5 years (I have not taken advantage of the roth 401k yet) -David

  • Yes, our plans typically include advice on these types of things.  We discuss your planning needs and come up with a pricing estimate at a complimentary introductory meeting. We work with clients across the country and so these meetings are frequently conducted via the web. Let me share a little more about how we work with clients,

Including myself I have 5 CFPs (Certified Financial Planners), 4 of whom are also RMAs (Retirement Management Analysts) that work with clients. We work as a team with each client being assigned a primary advisor. The team approach works well as we each have different areas of expertise. My time is spent on the operational and marketing aspects of the business so I no longer serve as the primary advisor for new clients. Here is a link to frequently asked questions about our services. With any new potential client we offer a no-obligation complimentary meeting. Prior to scheduling that we ask that you first fill out an online questionnaire. Once you have completed the questions, you receive a copy and we automatically receive a copy. I review those and talk to the team about who might be the best fit for you, and who has capacity. Then Jody reaches out to set a complimentary introductory meeting – much like a mutual interview – where we discuss specifically what you are looking for and agree on pricing, and then let you take whatever time you need to decide if we are a good fit. If you would like to complete the online questions, we would be happy to reach out and set up an introductory meeting. How do RMD divisors change each year? -Robert

  • Answer: Here is a link to my article on RMDs which contains a portion of the divisor schedule:  At the bottom of the article you will see a table that shows you how the divisor works.

Question: What is the best way to know how much one should have saved in order to consider retirement? -Tony

Question: Has Kitces done some additional analysis of glide paths? It seems I have seen a recent update that suggests that a fixed 60/40 might be a reasonable fit for many retirees, given both returns and degree of complexity in portfolio maintenance. – Alan

It all comes down to what risks you are hedging against. His conclusion was that the standard decreasing equity glide path was just fine. I believe that is based on probabilities. So far example, it may be just fine in 85% of market conditions (I am making these numbers up as an illustration – I don’t know the exact probabilities). We prefer a particular methodology because of the advantages in a worst case market scenario – and we find retirees feel very comfortable when they can see the bonds that will be maturing to meet their cash flow needs – it helps hedge against the behavioral risks and concerns that come with watching account values fluctuate in volatile markets. If we are responsible for the results we must use an approach that we think will allow us to deliver those results even in poor market conditions. But for the do-it-yourself investor managing their own portfolio I agree in most market conditions a standard 60/40 approach with systematic withdrawals will probably be quite sufficient. It is less complex, easy to manage, and if it is re-tested each year you would spot any potential problems many, many years in advance. If problems were spotted the adjustments that would need to be made would be less spending – and if problems are noticed many years in advance it is usually only a minor adjustment in spending that is need. Question: How much should I spend for a twice a year retirement advisor? -Tim

  • The answer depends on what it is you expect them to do and how much time it may take.  Here is a link to an article I have on the various ways that financial advisors charge. We work with people across the country via web meetings and structure our planning services as a package of hours to create the initial plan. When we package the hours the hourly rate is about $150. This link to Frequently Asked Questions about our services provides more detail. The more experienced the advisor, the higher the hourly rate or project fee will be. I don’t think retirement planning is the time where you want the cheapest solution.

Can you provide a link to the report mentioned by Wade Pfau? -Mark

Question: My retirement portfolio is only out of whack by about 1 to 2 percent from my 60/40 target allocation. It is at 61.5/38.5 percent  (stocks to bonds).  Do I still want to re-balance when there is so little difference?  I re-balance each  June and December. Also when a manager says to re-balance when you are off by at least 5%, does that mean the spread is off by 5% or one of the allocations is off by 5%.  Such as 65% stocks vs 35% bonds when I really want 60/40.  The spread here is 10%.  Can you please clarify? – Gerald

  •  Answer: It is unlikely we would rebalance if we were at 61.5/38.5. Everyone does rebalancing differently – most rebalancing software allows the manager to set tolerance ranges. So if using 60/40 it might be a tolerance range of +/- 3 points – so the portfolio could be 63/37 or 57/43 before rebalancing was triggered. Some rebalancing software uses a range in % terms – so +/- 10% would be 66/34 on the high equity side or 54/46 on the low equity side. The decision for each client depends on the size of the portfolio, the asset location (which assets are in what types of accounts) and the tax treatment. If equities need to be sold but they are all in a taxable account and the client has a lot of realized cap gains already, we would tend to use a wider tolerance range and wait to rebalance until we were in a new tax year. If the trades generated were small and there were trading costs involved we might determine the rebalancing amount was too small to warrant the cost of the trades and thus use a wider tolerance band. I think this paper on rebalancing by Vanguard does a great job of going into details:

Question:  I wonder if you could talk about ways of generating income for those folks (like me) who could not survive another 2007-2008 crash.  I just don’t have the runway since I am 60. I am told about Variable Annuities and Special Bond Funds using real bonds so you don’t lose principal.  I have your book and read it.  I am also a Kellogg MBA ’84, but all that cool stuff we learned fell apart in 2007-2008.  Unless you’re 20.  And as I said, I am not. All I can say is there is no “sure thing.”  But I knew that. I want to generate about $70K annually from a $2.9M portfolio ($1.9M already taxed, and about $1M in traditional and Roth 401K, mostly non-Roth), and not touch the principal.  That would be my goal and I wonder if it’s possible to do in an extremely risk averse way.  -B

  •  Answer: I think the challenge is people get locked in to ideas like “I don’t want to spend any principal.”  If you own a house, you may not want to lose any home equity. As long as you didn’t sell your house when the real estate market bottomed out – you didn’t lose your home equity. When you put together an investment plan it is similar. It is designed to generate a certain outcome – but the principal value will still fluctuate along the way. At a certain point you have to either accept that if you want something 100% safe you will accept low returns and will almost certainly need to spend some principal, or you accept some risk and give yourself the possibility that your portfolio will be able to maintain itself while generating the inflation adjusted income you want. Your goals are realistic. We would feel quite confident that a $2.9 million portfolio could generate $70k of inflation adjusted income for life with a very high probability that the principal would maintain itself.

 Question: Do you have an opinion on, and/or ever utilize the “secondary market annuities” ? – Abe

  • Answer: I have never utilized a secondary market annuity – but I would think if I would evaluate one it would be on the same basis as any annuity. What are the contractual guarantees you are receiving and what are you paying for them? My understanding is the secondary market annuities are typically sold by someone who is getting monthly payments but they want a lump sum. If you can buy the payment stream at a better price than with other options it may be a good option. I would want to carefully investigate the company brokering the transaction and make sure that you were in fact contractually entitled to the future benefits.

Question: With a pending divorce and in my mid-50s, are there any “must-do’s”.  Obviously this is a complex topic, but any thoughts would be welcome.  Thanks. – Paul

  • Answer: The biggest thing is not to get caught up in the emotion of the divorce. Bob Burger, one of our advisors, is a Certified Divorce Financial Analyst. He works with couples who want to work together during their divorce and figure out a fair, legal and equitable split of the assets. This process makes far more sense to me than fighting it out with attorneys. Here is an article of his called Divorce After 50 – 5 Things to Consider. That might give you a starting place!

Question: “If I have a pension income, SS income, and interest income only, and do not work, can I deduct property taxes and mortgage interest against those types of income?” –Barrett

  • Answer: The deductions against income works the same as it does while you are working. You total up all your income. Calculate your adjusted gross income (AGI). Then your reduce your AGI by the amount of your itemized deductions and personal exemptions to end up with your taxable income. But if you can afford to pay cash for the house with after-tax funds (meaning you don’t take it out of retirement accounts) and assuming you don’t have a lot of capital gains taxes to raise the cash, then paying cash is often the best option.

Question: Where can we download your free report of the worst money moves for near retirees?

Question: Do you favor a particular drawdown method? – Ted

  • Answer: Yes, we do. If we are managing the money we view it as our responsibility to deliver the retirement paycheck outlined in your plan. We thus choose an approach that we think provides the highest probability of achieving that goal over a variety of market conditions – not just over good or average market conditions. That leads us to create an income ladder for the first 5 to 10 years of cash flow needs and pair that with a growth portfolio of index funds.  If it was a 10 year ladder we would know the retiree could enter retirement knowing 100% of their cash flow needs were covered for the next ten years. That growth portfolio would then occasionally be harvested to add year on to the income ladder as money was spent. To implement this strategy we work with Asset Dedication, a portfolio manager that specializes in this approach. For clients who are managing their own portfolio we think the best approach for them is to use systematic withdrawals from a balanced portfolio. Here you can read more about our investment approach.

Question: What is your opinion on purchasing life insurance with a long term health care rider verse purchasing a long term health care policy?

  • Answer: I think all financial products are tools. The challenge is figuring out what the job is and which tool is best suited for that job. I would have to know your financial situation as it was projected to be in your early 80’s, and then compare the costs and benefits offered by one tool (life insurance with a long term care rider) vs another (traditional long term care policy) to form an educated opinion.

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November’s Online Class: The Secret to Finding the Perfect Investment

November's Class: The Secret to Finding the Perfect Investment

November’s Class: The Secret to Finding the Perfect Investment – Click pic above to register.

In November’s free online investment class we’re going to cover basics like what is a stock, what is a bond, how mutual funds work, the difference between passive and active investing and much more.

Then we’re going to look at this in light of the ongoing quest for the “perfect investment” and how you can use this info to design the perfect investment approach for you.

This class will be live. It will run about one hour followed by questions and answers. It will be offered on a Tuesday evening. Specifics below.

Dates

  • Tuesday, November 4th, evening, 5 pm PST/6 pm AZ and MST/7 pm CST/8 pm EST – class limited to first 100 attendees

Registration Required

What You Will Learn

In addition to gaining an understanding of investing basics you can expect to learn:

  • The risk differences between investing in stocks vs. stock mutual funds.
  • How bonds and bond funds react to changes in interest rates.
  • The difference between passive and active investing approaches.
  • The single biggest proven way to choose the best performing funds.
  • How often bear markets and market corrections occur – and how they affect you.
  • How portfolios are typically constructed and why.

Who

  • You: This class is appropriate for all age groups and anyone who has ever owned investments.
  • Your presenter: This is a live one hour presentation followed by Q&A hosted by retirement expert Dana Anspach.

Next Class

We’ll be announcing our next class time and topic soon. To receive announcements about our free online investment classes scroll all the way to the bottom of any one of our web pages and sign up for our Financial Sense newsletter.

Last Class

Watch a recorded version of October’s class at The Key to Retirement Success.

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How to Put the Meaning into Retirement

What will turn your retirement into Retire-Meant?

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You have a unique opportunity in retirement. A large portion of your time is no longer needed to sustain yourself. You have true financial independence and the possibility of using your time to contribute to anything you want – whatever matters the most to you.

Given that, if there was one thing and only one thing I could get you to do as you transitioned to retirement, what do you think it would be?

Most of you are probably smiling thinking “She’s going to say we need to get a financial plan.”

Nope, that’s not it.

The one thing I would want every near retiree or existing retiree to do is attend The Landmark Forum.

In September 2014 I had the life-changing experience of attending Landmark’s three day workshop about Living a Life You Love.  It was a colleague of mine who suggested I go. I cannot thank him enough.

This workshop is something I wish every human being was required to do. Sounds dramatic, I know.

But if not every human being, then at least every retiree. Because collectively you retirees have the power to change the world. You have the time and the experience to make a difference. It could be a difference in a child’s life, an organization’s direction, your community, your church, your family…

The challenge is… how? The Landmark Forum will show you.

You have the possibility of putting the Meaning into your retirement in a profound and deep way that may never have occurred to you before. You have the possibility of having these be the best years of your life and not just in the way you may read that on a greeting card – but truly the very best and meaningful years of your life.

Our role in that is to free up your finances so you don’t have to worry about money. Free of that concern, time and energy can be directed toward so many other things that matter.

I would describe my own experience with Landmark’s program as if someone gave me ‘The Secret to Life’. Every time I say that to someone they ask me “What is it?” There is no way for me to answer with words. What I can promise you is your discovery will be meaningful and personal to you.

Landmark is a world-wide program that has a profound impact on people of all nationalities, religions, economic, and educational backgrounds. I encourage you to go. You can learn more at Landmark Worldwide.

If you register, please email me as I would like to be part of your journey and would like to personally share with you my own experience.

What I want you to experience is Retire-Meant, not retirement.

By Dana Anspach

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Investment Sense – Short Term Memories

Index Returns Through June 30, 2014

Index Returns Through June 30, 2014

The conference room was full with over 100 financial advisors in attendance. The speaker asked a simple question. What were two of the biggest items in the media in the last few years that all your clients were asking about?

I guarantee many of you reading this asked us about these things – and considered moving your portfolio to cash – just in case.

Can you remember? They were:

  1. Greece
  2. The Government Shutdown

We fielded numerous questions about these things and spent a lot of time “talking people off the ledge” so to speak; meaning encouraging them to stay invested.

Turns out, today, no one can even remember what it was they were so worried about.

Long term portfolio strategy is not – and should not – be dictated by current events. As we stand today, risk is long forgotten (which is worrisome) but no doubt soon enough the media will find something to pontificate about and you may begin thinking “Should I cash out?”, “Should I buy gold?”, “Should I put it all in the safe….?”

If your portfolio was built with a long term goal in mind the answer will be “You should stick with the plan.”

You make the plan when you are in a sound, stable, unemotional mindset. It gives you a path to follow when current events throw you into an overly emotional or less-than-stable mindset.

As things stand right now, you may feel your plan is too conservative. In the first half of this year stocks of all kinds have seen gains with the S&P 500 up about 7% for the year and other equity asset classes delivering increases between 3% (U.S. Small Cap) and 17% (U.S. REITs). (The graph at the top shows results for each asset class through June 30th, 2014, for the month, past five years, and past ten years.)

Just as negative current events engender fear, positive current events elicit greed. When markets climb, it is easy to get greedy and feel like you could have gotten more.

I will never forget practicing in Colorado in 1998 and sitting down for a review with a client who owned a bond fund, a blue chip stock fund, and a science and technology fund. Their bonds and blue chip stocks had floundered, while science & tech was up over 90% for the recent 12 months.  They insisted on moving all their money to the science & technology fund. I made them sign a statement saying this was against my advice. Over the next few years science and tech experienced unprecedented losses. Getting greedy is not part of a well-designed long-term plan.

Now is not the time to get greedy and take on more risk. Now is the time, just as during any other time, to stick with the plan.

The plan we have built for you will take into account current market gains. For those of you in retirement and taking regular withdrawals, we will be determining if we should take gains off the table. This involves measuring your accounts against your plan, assessing future withdrawal needs, and evaluating tax consequence – before any changes are made. This is our job. This is part of the plan.

*Returns data in graph above from Advisor Intelligence. When possible we report index fund returns to show performance net of fund fees. As such in the graph:

  • Total Bond Market Index is: Vanguard’s Total Bond Market Index Fund(VBMFX)
  • US Large Cap is: Vanguard’s 500 Index Fund (VFINX)
  • US Small Cap is: Vanguard’s Small Cap Index Fund (NAESX)
  • Real Estate is: Vanguards’s REIT Index (VGSIX)
  • International Large cap is: Vanguard’s Total International Stocks Index (VGTSX)
  • International Small Cap is: MSCI World Ex USA Small Cap Index (not a fund)
  • Emerging Markets is: Vanguard’s Emerging Market’s Index Fund (VEIEX)

(Investment Sense is an almost-monthly posting of market commentary with a common sense twist. For all our latest commentary follow us on Facebook.)

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