Retirement Archives | Integrated Retirement Advisors

RMDs Are Back for 2021

 

 

 

RMDs, or Required Minimum Distributions, are withdrawals that are required by the IRS each year out of your traditional retirement accounts like 401(k)s and IRAs starting at age 72. The money that you have to take out annually by December 31st at midnight is taxed based on your income tax rate for that tax year.

Some retirees forget about RMDs when planning for retirement, and don’t realize how big the tax bite may be for them. This year, because of the pandemic, the CARES Act suspended the RMD for the 2020 tax year in an effort to help retirees avoid withdrawing money from accounts when the market was down.

(An RMD is calculated based on the closing balance of the account at the end of the previous year. When the markets drop significantly, the RMD represents a much higher percentage of a diminished portfolio and that reduces the ability to recover from big losses.)

In 2021, the RMD will be back. As an example, a 75-year-old man with a traditional IRA worth $100,000 will have to withdraw $4,367 this year.

Roth 401(k) Plans

Roth 401(k) plans, which are funded with after-tax dollars, are subject to the same RMD rules that traditional 401(k) and IRA plans are. The amounts are calculated using the same IRS life expectancy tables and account holders must begin taking them after they turn 72. (One exception is if you continue working after age 72 for the company that sponsors the plan and you don’t own more than 50% of the company.)

The difference is that Roth 401(k) withdrawals are usually not taxed.

You can avoid taking the minimum distributions entirely by rolling a Roth 401(k) into a personal Roth IRA, which is not subject to RMD rules.

2020 RMDs Without Penalty, But With Taxes

As part of the CARES Act, the IRS allowed COVID-related withdrawals from traditional retirement plans up to $100,000 without penalty in 2020 for those who were impacted by the pandemic. Income taxes were due on those withdrawals, which could be paid over a three-year period. Those who can afford to can pay the withdrawals back this year (or over a three-year period) can get the taxes back by filing amended tax returns.

Those Who Just Turned 72—It’s Complicated

The SECURE Act of 2019 raised the age when RMDs must begin to age 72. If you turned 70-1/2 in 2019, the old rules applied—your first RMD should have been due April 1st, 2020. However, because the CARES Act suspended RMDs, the new due date was April 1, 2021 for those individuals.

For retirees who turned 72 in 2020 or will turn 72 this year, you can take your RMD at any point in 2021, or even delay it up until April 1, 2022. But if you choose to delay it, you will owe two RMDs in 2022, which could put you into a higher tax bracket.

You should check with your tax professional before making decisions about RMDs, because there are strict rules about which accounts must be withdrawn from and stiff penalties for mistakes—to the tune of taxes owed plus an additional 50%!

 

To discuss your retirement plan, including RMDs, please call us. We are happy to discuss ideas with you and/or your tax professional. You can reach Nahum Daniels at Integrated Retirement Advisors at (203) 322-9122.

 

This article is provided for educational purposes only and its content should not be relied upon for tax advice. As always, check with your tax professional or attorney for specific tax advice related to your situation.

Source:

https://www.cnbc.com/2021/03/01/required-minimum-distributions-on-retirement-plans-are-back.html

7 Tips to Resolve Financial Issues Between Couples

No matter how long you have been together, financial issues can wreak havoc on a committed relationship. According to Investopedia, some of the top money issues between partners include money/personality style clashes, debt, personal spending, children, and extended family differences.

When couples don’t agree about spending and saving habits, it can lead to stress, arguments and resentment. Here are seven ways you can address financial issues positively, preferably before they arise.

  1. Understand Your Money Styles

Think of some extreme examples of money styles in your circle. Like your friend, the foodie, who won’t touch a bottle of wine that costs less than $75. Your sister who constantly surfs Amazon with boxes showing up at the doorstep day and night. Your mom who washes aluminum foil, folds and reuses it. And your stepdad who always insists on buying everything for the grandkids, fixing his own 30-year-old car, and keeping his handwritten savings ledger to the penny.

Everyone has a money style, and it’s helpful to talk about it without any name-calling or labeling involved. Understanding your partner’s spending habits often involves a deep-dive into money fears, scarcity memories and childhood traumas. Empathizing with your partner while freeing yourselves from negative patterns can be done if you work together. The most important thing is to come up with a spending plan that works for both of you, and hold yourselves accountable to work the plan together.

It’s also very important to check any power plays that may be happening at the conscious or subconscious level. The biggest money-earner shouldn’t think they have the largest say or the only right to dictate how the money gets spent; a marriage should be equally balanced. The partner who earns less and the partner who earns more both need to cooperate as a team to create a spending plan that’s fair for both of them.

So, check your ego at the door. It’s true that money is power, and few things build resentment faster than being made to feel inferior. The person earning more should take great care to act with empathy while taking care of their own needs reasonably rather than selfishly.

  1. Decide How to Divvy Up Bills…and Save for Future Goals

There are several ways to pay the bills. You can both put all your earnings in a joint account and pay everything out of that. You can divide bills based on a percentage of your earnings. Or you can split bills down the middle and keep the rest of your own earnings for yourselves.

Once you have decided how the bills get paid, you need to devise a plan for saving for your long-term goals—like purchasing a home or securing your retirement. Remember that you need to work closely together as life changes arise—such as one of you losing a job, cutting back on hours to care for a parent, or one of you becoming disabled. If 2020 has taught us anything, it’s that contingency plans are always advisable. Putting together a financial plan for your future is a great first step toward a financially healthy future.

  1. Create Personal Spending Allowances…That Stay Personal

Having some personal money that’s designated just for you each month can really help how you feel about your relationship. It can also help avoid relationship-ruining behavior like “financial infidelity,” when one spouse hides money or purchases from the other. The personal spending allowance gives each partner the chance to spend their money however they wish, no questions asked—including gifts to each other, a new pair of shoes, or coffee every day on the way to the office. In most cases, the personal monthly spending allowance amount should be equal for both of you so that resentments can’t arise.

  1. Compromise on Spending for Children and Family Members

On average, it costs $233,610 to raise a child to age 18, according to the U.S. Department of Agriculture. That doesn’t include expenses for grown children, helping them with the purchase of cars or homes, or funding other (expensive) needs that might arise for them.

Furthermore, spending related to the extended family on both sides can also be tricky, especially as your expectations can be very different from your spouse’s when it comes to helping family members out or getting involved with costly family vacations or activities.

Addressing these discretionary expenses and agreeing on them before to committing to children or other family members is critical.

  1. Face and Eliminate Undesirable Debt

Some debt may be necessary or even advisable depending on your tax situation, for instance, some people need or want a mortgage interest write-off. Other debt should be paid off following a plan that you both agree upon—be it credit card, car loan or student loan debt.

In most states, debts brought into a marriage stay with the person who incurred them and are not extended to a spouse, but debts incurred together after marriage are owed by both spouses. Debts incurred individually married are still owed by the individual, with the exception of child care, housing, and food, which are all considered joint debt no matter what.

There are nine states where all debts (and property) are shared after marriage regardless of individual or joint account status. These states include Arizona, California, Nevada, Idaho, Washington, New Mexico, Texas, Louisiana, and Wisconsin. In these states you are not liable for most of your spouse’s debt that was incurred before marriage, but any debt incurred after the wedding is automatically shared—even when applied for individually.

Both partners should have an honest discussion about curtailing bad spending or financial habits. Couples should also employ a strategy to pay off debt—such as paying off the higher-interest debt first or paying off the smallest loans first (the snowball method).

  1. Set a Budget You Can Both Live With

One of the best ways to keep in sync with your partner when it comes to finances is to have a budget as part of your overall financial plan. The budget includes your household bills, your personal spending allowance, your debt-paying strategy, and your monthly budget for long-term goals like retirement.

  1. Communicate Honestly

Lack of communication is the source of many marital issues, and talking regularly, honestly, and without judgment is where the hard work of marriage comes in. Some couples may even find it helpful to actually schedule a time once a month or once a quarter to revisit short- and long-term goals with each other, and meet at least once a year to discuss objectives with their financial advisor.

Don’t talk about things when you’re tired, angry or have had too much to drink—organize and adhere to clearheaded discussions for success. Honest communication can help you both face and conquer the financial challenges of life, changing course and adjusting along the way.

 

If you have any questions, or would like to review your finances together as a couple, call us! You can reach Nahum Daniels at Integrated Retirement Advisors at (203) 322-9122.

 

 

Sources:

https://www.investopedia.com/articles/pf/09/marriage-killing-money-issues.asp

https://www.usda.gov/media/blog/2017/01/13/cost-raising-child

https://www.kiplinger.com/personal-finance/602036/a-marriage-starter-plan-for-finances-even-if-youre-late-to-the-party

https://www.marriage.com/advice/finance/how-to-overcome-financial-conflict/#:~:text=Married%20couples%20fighting%20over%20financial,couples%20fail%20to%20do%20so.

Yes, You Can Lose It All, Even If You’re Wealthy

by M. Nahum Daniels

If you’ve been wondering about the book I wrote, RETIRE RESET!, we are publishing some excerpts right here on our blog so that you can learn more. Along the way, you will learn why our firm, Integrated Retirement Advisors, was founded: we’re on a mission to help people with retirement!

 

Here are some excerpts from Chapter 6.

Chapter 6: WALL STREET INSECURITIES

       “Unless you have millions and millions and millions … you cannot retire on the investment return on your savings … because there is no return on it.”

       Jeff Gundlach, Bond King & Modern Art Collector, Founder and CIO, DoubleLine Capital

 

I first conferred with Mauricio in 1995, overlooking New York’s Central Park from a Fifth Avenue penthouse filled with modern art. Studying his experience as a do-it-yourself retiree has taught me an invaluable lesson: Even if you enter retirement with many millions, you are always subject to the risks, rules and ratios embedded in modern retirement planning. Should they go misunderstood or ignored, the result can be depletion and austerity—no matter how wealthy you may be starting out. Retirement success, on the other hand, especially if you have only modest wealth, depends on an informed approach to managing your nest egg that properly balances your capital and spending over an open-ended time horizon.

Do you find it hard to believe that even the very rich can run out of money? (Do you find it even harder to be sympathetic?) Allow me to demonstrate the vital lessons worth learning.

Deciding to enter retirement as he turned 65, Mauricio had just completed the sale of a Parisian fashion company he founded, clearing a nest egg of $100 million. Our purpose in meeting that day was to discuss his legacy planning. He faced a 50% estate tax upon his death and was looking for ideas that could mitigate the impact of those levies on his children and grandchildren. As for Mauricio’s income planning, he wasn’t looking for help from me or anyone else. He made it clear that he would consider only US Government bills, notes and bonds.

Mauricio, as it turns out, had serious trust issues. A Holocaust survivor, he spent some of his formative years in Buchenwald, the Nazi slave-labor camp near Weimar, Germany. At age 15, he was one of the prisoners liberated by American troops in April 1945. While maintaining his European connections and building a post-war business there, Mauricio became a proud and grateful American citizen, trusting in the inherent goodness and reliability of US government promises. It was simply unthinkable that the United States of America could ever default. In his mind, government paper was as safe as safe could be, and he viewed it as the key to a “risk-free” retirement that would let him sleep soundly at night while enabling him to live a fulfilling life by day.

And he wasn’t one to fuss. A saver at heart, he’d be happy to buy and hold US notes for their ten-year duration and simply roll them over to new issues when they matured. He would hear of nothing else. Risk was anathema. Professional advice was gratuitous. He would manage his own money by lending it (safely) to the US Treasury.

Besides, in January 1995 savers like Mauricio could still thrive. The risk-free 10-year Treasury note was yielding 7.69%. In theory, it would pay him annual interest of $7,690,000 for ten years without having to dip into principal. What’s more, that yield was tax-advantaged: Interest income on US Government obligations was then (and is still) given preferential tax treatment. He would have to pay about 40% in federal income taxes but would avoid New York state and city taxes that together could have easily added another 10% or so to the burden.

Mauricio estimated that around $4.6 million spendable dollars would enable him to fund his family needs and essential living requirements, his discretionary globetrotting, his passion for modern art and his generous philanthropy. So, he matched his lifestyle to the income his capital would generate. “Living off the interest,” he began his retirement by effectively withdrawing 7.97% from his nest egg. As for his estate-tax obligation, he would simply set up a life insurance trust and be done with it.

Later on, I learned that Mauricio had failed to factor in inflation, which averaged around 3% a year during the decade that followed (and even more in the prices bid for modern art). To keep up with his increasing cost of living he would have to up his annual withdrawal. To avoid dipping into principal, Mauricio faced the sacrifice of reducing his art-buying and charitable giving. He decided to give his lifestyle priority. Luckily, falling Fed interest rates during this period mitigated any capital depletion as he sold some of his bonds into a rising-price market. Still, after ten years, he found that he was left with only $85 million of the $100 million with which he began (Table 2).

When he rolled his portfolio over in 2005, however, 10-year rates on government notes had fallen to 4.16%. Reinvesting his capital at age 75, he would be earning $3.54 million in interest, less than half of what he had started with ten years earlier, and after federal income tax, it would leave just $2 million spendable dollars. Meanwhile, his annual expenses had inflated to over $10 million. Withdrawing $10 million a year from an $85 million nest egg would equate to a 12% annual withdrawal rate. Now 75, he wanted that money to last him another 25 years, just to be safe, and a 12% withdrawal rate would put him at great risk of premature depletion.

Facing the same challenge that can confront every retiree, Mauricio recognized that something had to give—despite the abundance with which he was blessed. He would either have to cut back his lifestyle or tap into principal and risk running out of money. He decided to reduce his annual withdrawal to $6.5 million. His art collecting slowed; his travels became less frequent; his charitable contributions less charitable. Bottom line: He started to feel pinched.

Despite the belt-tightening, at age 85 Mauricio found he only had $42.5 million remaining when the time came to replenish his matured portfolio with newly issued bonds. His luck couldn’t have been worse. It was January 2015 when the ten -year rate hit 1.81% and Mauricio had to face the reality that his remaining principal would generate taxable interest of just $766,000 each year! Still healthy and active, he found himself a victim of his own loss-aversion, severely set back by the Fed’s Zero Interest Rate Policy (ZIRP). His was an almost unbearable dilemma: Accept more austerity by further shrinking his lifestyle, family and charitable giving (and start to sell off his beloved art collection) and still face possible depletion at age 95—and/or chase higher yields by taking on more risk.

TABLE 2. MAURICIO’S SURPRISING RETIREMENT OUTCOME

A Shadow Banking Crisis

Mauricio’s dilemma is the same one that has faced all savers since the Great Recession of 2008 [and we are seeing it again now, during the current 2020 crisis]. Low yields pressure you to turn to a subset of “shadow banks” for greater returns.

Like the big commercial banks, the shadow banks are financial intermediaries. Unlike their commercial counterparts, they are not “cash depository” institutions; they are neither able to borrow from the Fed’s discount window in a crisis nor insure your account for up to $250,000. Some of the shadow banks—the ones of interest to us as investors—specialize in the issuance, custody and trading of non-cash financial instruments known as stocks and bonds. These institutions include the investment banks, broker dealers, money management firms, mutual fund companies and hedge funds that comprise the Wall Street community.

The Wall Street subset of the shadow-banking universe provides no guarantees. On the contrary, like commercial banks they commerce in risk—offering returns arguably great enough to compensate for the possibility of “capital impairment,” i.e., financial losses, temporary or otherwise. The Wall Street shadow banks earn money by exposing your cash to risk and trading their own.

Transforming Savers into Investors: [Stocks and Bonds] 

When buying a bond, you’re lending money to a government or business in return for an interest payment over a given period of time, at the end of which you expect to be fully repaid. Like lending to a bank when you make a deposit, you are giving the borrower the use of your money for a price. Bonds come in a myriad of forms, offering claims against the borrower’s assets in the event of default based on the specific terms of the loan set forth in their respective indentures. If a secured borrower defaults, you may claim against its assets for repayment and you may come before other types of creditors. The less risk incurred in making the loan—i.e., the more credit-worthy the borrower—the lower the interest offered. When held to maturity, the interest payments over time comprise your yield. Their steady cash flow stabilizes their value, so in terms of price, bonds tend to be less volatile than stocks.

Buying a share of stock represents an incident of ownership, or equity, in a business. Stocks have no maturity date; you own them until you decide to sell them. Their payouts come in the form of dividends made at the discretion of management—both in terms of magnitude and periodicity. Some years you may get more, some less, and some none depending on the company’s operating profitability and other financial circumstances.

Among larger, mature dividend-paying US companies, dividends reflect about 50% of annual earnings. Dividend flow as a percent of the share price you paid is a critical component of stock ownership, sometimes amounting to 40% of the total return earned over time. But as an owner, you are taking the risk of total loss in the event of business failure because you are at the bottom of the capital stack, and lenders get paid first. Risk of total loss is balanced by the potential for greater reward in the form of price appreciation.

Company growth tends to be reflected in a rising share price, offering the potential for a gain on the capital you invested in addition to the dividend yield. These two components—dividends and gains—make up the “total return” potential of your invested capital.

Importantly, stocks tend to be much more volatile than bonds in terms of price.

The Wall Street brokerages buy, sell, hold and trade securities (including stocks and bonds) for their customers’ accounts. Wall Street dealers also own stock and bond inventories to facilitate customer transactions and earn proprietary trading returns.

Broker/dealers do both. The money center commercial banks, like Bank of America, have wealth management arms that are their broker/dealer affiliates, like Merrill Lynch.

Like the global economy, the investment business too is always evolving. Traditional stockbrokers can execute customer orders or make recommendations considered suitable based on their knowledge of the client’s risk tolerance, investment objectives and time horizon. Fee-based portfolio managers at mutual fund companies, money management firms, and hedge funds usually require a free hand to buy and sell securities on a client’s behalf, so handing over discretion to the portfolio manager is often mandatory. Commission-based brokers at the big bank “wire houses” and other execution-based brokerage firms typically require a client’s consent to a trade before its execution.

Trading for Trading’s Sake

With or without discretion and whether commission- or fee-based, the buying and selling of securities encapsulates the raison d’être of the Wall Street shadow banks, and securities trading is their lifeblood. But trading for trading’s sake tends to invite speculation and receives criticism from buy-and-hold investors who tend to be more analytical and systematic.

Beginning in the late 1990s, stockbrokers took on the title “financial advisor” when the big wire houses shifted from a commission- to a fee-based revenue model and wanted to exude a more knowledgeable, caring and comprehensive approach to customer service. Fees are a steady income source that levels out brokerage-firm cash flow, so most firms prefer them to the less consistent flow derived from broker commissions.

Trading is a win/lose proposition that pits buyers and sellers against each other, with both sides seeking an advantage. Buyers want to spend less and sellers want to get more for their securities. Traditionally, investment securities are valued—or priced—based on specific free -market fundamentals. For bonds, the key metric is “yield,” or the cash flow they generate. Yield translates into price: the lower the yield an investor is willing to accept, the higher the price that investor is willing to pay for a bond—the standard of “fixed income” investments.

Bonds reflect the forces of supply and demand in capital markets. If borrowing demand is high and money supply is low, the cost of money naturally rises and borrowers offer higher yields in the form of interest on the debt they issue. If money supply is plentiful and loan demand soft, lenders are likely to accept a lower rate for putting their surplus cash to work. In a free market, the forces of supply and demand naturally find equilibrium.

An important concept that retirement investors need to understand is that underlying Wall Street’s advice is a narrative that can give rise to exaggerated expectations and a methodology that can ultimately cause your undoing. Rather than buttressing the retirement process, the conventional principles of diversified investing, applied to retirement portfolios, may actually reduce portfolio reliability. Investing in securities at the wrong times and under adverse conditions can increase the odds that you run out of money; if you do make poorly timed decisions, then protecting yourself and improving your probability of success require you to self-impose austerity from the moment you start spending down.

The Wall Street Retirement Portfolio

The “balanced portfolio,” which can sometimes over-weight stocks and at others over-weight bonds, has become Wall Street’s signature retirement planning product. Applying Modern Portfolio Theory (MPT), it diversifies among stocks and bonds along an efficient frontier of return per unit of acceptable risk. A 60-40 stock/bond mix is deemed suitable by regulatory authorities for most individuals with median risk tolerance, so an advisor or firm can rarely be faulted for recommending it, even if an outcome falls into the rare extreme of return distribution. If the S&P 500 Index historically averages 10% growth per year and the UST 10-Year averages 5%, then a 60%/40% stock-bond portfolio can be expected to average 8% going forward, goes the oft-repeated incantation.

While the exact composition of each asset class may differ somewhat from firm to firm, most Wall Street customers end up with remarkably similar “investment policy” portfolios in terms of allocation, downside risk exposure and upside potential.

Projecting future returns based on historical averages is known as “deterministic” modeling. It is a form of linear forecasting wherein expected returns do not vary over time—and that’s its key flaw: the average return is most likely the one return an investor will never receive. Thanks to the increasing availability of computer power, “stochastic” modeling has grown in popularity. Applied to statistical sampling, stochastic modeling incorporates randomness. It has been tailored to retirement planning in the form of Monte Carlo simulations, named by one of its original developers after his favorite pastime—calculating the odds of winning at the casino.

In Monte Carlo computer software, returns and inflation are treated as random variables. Monte Carlo “engines” generate thousands, tens of thousands or even hundreds of thousands of possible combinations that produce a probability analysis, i.e., a statistical range of outcomes reflecting the financial impact of various return sequences. Now the standard retirement “modeling” tool, it perfectly captures the Wall Street approach to securities-based retirement planning by surrendering to uncertainty and accepting the necessity of playing the odds.

Changing the input assumptions and the type of mathematics used in a given Monte Carlo engine can materially alter the results. Critics focus on this subjectivity, which they claim introduces bias into the design. Mathematician and financial advisor James Otar, CFPTM, argues that the methodology tends to overstate the probability of favorable outcomes, giving clients a dangerously ex-aggerated sense of security.

Leading researchers in retirement-income planning have recently published seminal studies that address these issues, with some surprising conclusions. Working together, professors Wade Pfau, PhD and Michael Finke, PhD, of the American College of Financial Planning, along with David Blanchett, CFA, CFP, head of retirement research at Morningstar Investment Management, tested the 4% Rule under historic return assumptions and then under forward-looking assumptions, illustrating the possibility of Shiller CAPE-based lower returns.

The group confirmed that based on historical data (stocks returning 12%, bonds returning 5% and a CAPE ratio of 16), a portfolio allocation to stocks of roughly 15% or more would have likely achieved a 90% probability or better that a portfolio would survive thirty years paying out 4% adjusted for inflation.

But if future expectations are lowered based on current interest rates (bonds at 2.5%) and the reduced stock returns predicted by today’s above-average CAPE ratio—even if lowered only modestly—the odds of success plummet, barely exceeding 50% no matter how high the stock allocation!

This industry-standard Monte Carlo probability analysis conveys a stunning implication: Using forward-looking assumptions, Bengen’s “the more stock the better” equity recommendation for portfolio reliability may be overstated. Given reduced future returns, it may even court disaster, driving the odds of 60/40 portfolio success down to 56%—or little better than a coin toss.

Figure 34. Projected Success Rates

Looking ahead based on lowered return expectations, Blanchett, Finke and Pfau questioned how a 90% (or higher) probability of portfolio success can be sustained. The answer: Only by reducing the [retrirement] withdrawal percentage in inverse ratio to the equity allocation; in other words, the higher the ratio of stock held in a portfolio, the lower the safe withdrawal rate you should use and the less income you should take.

Chapter 6 Takeaways

  1. Investing involves risk, including, in the worst case, a total and permanent loss of your principal. Past performance is no guarantee of future results. Neither asset allocation nor portfolio diversification guarantee profit or protect against loss in a declining market. Bonds are subject to interest rate risks. Bond prices generally fall when interest rates rise.
  2. The projections or other information generated by Monte Carlo analysis tools regarding the likelihood of various investment outcomes are hypothetical in nature. They are based on assumptions that individuals provide, which could prove to be inaccurate over time. Probabilities do not reflect actual investment results and are by no means guarantees of future results. In fact, results may vary with each use and over time.
  3. It is advisable to understand the risks, rules and ratios embedded in the financial dynamics of modern retirement if you want to avoid failure—regardless of how much money you have at the start.
  4. Former Fed Chairman Ben Bernanke’s “new normal” of very low interest rates has turned many yield-starved savers into return-chasing speculators.
  5. Given current market valuations, the Shiller CAPE and other historical market metrics caution that equity returns over the next ten years or more may be lower than long-term averages might lead us to expect.

Questions for your financial advisor

  1. Do you rely on a Monte Carlo “tool” to project the probability of my (our) retirement success, and does that mean you can manipulate its mathematical assumptions to reflect better or worse outcomes?
  2. Do you counsel your clients to trust that the future is going to be rosy, or do you recommend they plan to withstand the worst while hoping for (and positioned to participate in) the best?
  3. If I’m nearing or in retirement, what initial withdrawal percentage would you recommend to set a floor for distributions from my nest egg?
  4. How did the balanced portfolio you’re recommending perform peak to trough, i.e., from October 2007 to March 2009?
  5. If we get a repeat of that performance at any time over the next ten years, what will it mean for my (our) withdrawals and standard of living thereafter?

 

###

If you would like to discuss your personal retirement situation with author Nahum Daniels, please don’t hesitate to call our firm, Integrated Retirement Advisors, at (203) 322-9122.

If you would like to read RETIRE RESET!, it is available on Amazon at this link: https://amzn.to/2FtIxuM

Banks Making Money—For Banks

by M. Nahum Daniels

If you’ve been wondering about the book I wrote, RETIRE RESET!, we are publishing some excerpts right here on our blog so that you can learn more. Along the way, you will learn why our firm, Integrated Retirement Advisors, was founded: we’re on a mission to help people with retirement!

Here are some excerpts from Chapter 5.

Chapter 5: THE MONEY MAKERS

In the aftermath of the Global Financial Crisis (GFC), governments and regulators have recognized that banking practices were not incidental to the global crisis that almost crashed the world into an economic depression; the failings of a fragile global banking system were at its heart. Indeed, a more accurate account of events might depict a “Global Banking Crisis.” So, after 2008, managing “systemic” banking risk became the focus, containing it became the goal, and internal compliance departments burgeoned, while equity, fixed income and commodities trading desks shrank. Banking processes and culture came under the spotlight and the picture that emerged wasn’t pretty. Many observers were shocked to learn that high-powered bankers were rigging global financial markets.

Protected and Privileged 

Criticized for brazen self-dealing, elitist privilege and even criminal misconduct, banking culture has come under increasing scrutiny since the Great Financial Crisis. For malfeasance ranging from manipulating the London Interbank Offered Rate (LIBOR) at which banks lend to each other and to which $800 trillion in global assets are pegged, to price-fixing Credit Default Swaps (CDS), to precious metals and energy trading, dozens of the biggest American and European banks have been fined for restraining competition via secret meetings held by traders to benefit themselves and their institutions.

Years of scandal and allegations of misconduct have taken a serious toll. Battered by an unending barrage of revelations, Americans’ confidence in banks stood at 27% in a June 2016 Gallup Poll, well below the 40% historical average. Whether liberal or conservative, only one in four Americans were willing to say they had “a great deal or quite a lot” of confidence in banks, a level that is unchanged since 2013.

Nevertheless, it’s no exaggeration to say that big banking remains a protected industry and high-powered bankers comprise a privileged elite. Why are we, the people, so forgiving? What exactly do banks contribute to our economy that renders them so essential?

Banks Make Money 

Large banks serve as the repository for the money that greases the wheels of commerce—the wellspring of our prosperity and standard of living—while they manage the global payment system that enables willing buyers and sellers around the world to transact business.

At its core, modern banking is the business of lending. Banks fill the role of financial intermediary between borrowers and savers. From its inception in the Middle Ages to serve the gold trade— storing, lending and issuing banknotes representing deposits held of the precious metal—bank lending was ingeniously built around other people’s money (OPM).

Sound banking practices would have dictated that a banker kept a 100% reserve against demand deposits, holding an ounce of gold in the vault for every one-ounce banknote issued. But bankers realized that they could lend a multiple of all the gold money deposited by their lenders by creating a multiple of banknotes against the same reserves, then keeping 100% of the interest charged on the overage.

US financial history is littered with banks that failed due to a mismatch of fractional reserves to depositor claims when poor judgment and/or bad business conditions caused losses from nonperforming loans. This is what happened during the great banking panics of 1893, 1899 and 1907. And it’s exactly what happened during the Great Depression. The stock bubble collapse in 1929 and ensuing margin calls led to the liquidation of $20 billion of bad bank loans extended during the previous debt bubble, about half of which ($9 billion) was stock market margin loans. This liquidation was followed from 1931 to 1933 by four waves of bank runs.

The Federal Reserve System: America’s Central Bank 

The Federal Reserve System had a far more modest purpose than it does today when it was first launched in 1913. It was originally designed to serve the public interest and maintain financial stability by heading off the recurrent financial panics that a less unified banking system had suffered previously.

Starting in the 1980s, the Fed began to grow into its much larger, current role as accommodating buyer of government debt and comanager of the nation’s economy. It was at this time that deficit spending took off. The Federal Reserve System has since become a principal agent of government; by buying federal debt, it has enabled politicians to spend without taxing. Unlike all other central banks, however, and despite appearances, the Fed is not an agency of government. It is privately owned and operated by its member banks.

The complex product the central banking system offers is credit. Credit is first a measure of worthiness. It is also a byproduct of leverage because it is derived as a multiple of other people’s savings. Above all, credit can be monetized; like currency, it is a form of money that has its own financial reality. Banks turn credit into money by issuing debt. The reality is that banking does not “print” money into being, it “lends” money into being. In an ingenious feat of financial engineering, banks create money when they lend wealth that they themselves have borrowed!

Debt 

For lenders, sound debt is good and the more of it that is outstanding, the better. The good news for lenders is that these are boom times for debt.

Dr. Ben Bernanke was Fed chairman in 2008. His response to the Great Financial Crisis / Great Recession of 2008-09 was three rounds of Quantitative Easing (QE), creating money to buy government and federal housing agency securities for the Fed’s balance sheet, while releasing reserves to member banks at little to no cost. Bernanke admitted that while Quantitative Easing was consistent with Monetarist theory, it was still only “an experiment,” but central banks around the world still followed headlong and did the same.

 

     “Central banks launched the huge social experiment of quantitative easing (QE) with carelessly little thought about the side effects.”

     ~William White, PhD Ex-Chief Economist,

                        Bank for International Settlements

 

Integral to loosening the money supply and making loans cheap, Bernanke initiated ZIRP, the Zero Interest Rate Policy. ZIRP set the interest rates over which the Federal Reserve had control at close to zero.

Unfortunately, these rates also set benchmarks for interest paid on customer deposits, driving rates down to a pittance and crushing your savings’ earning power. The financial fortunes of risk-averse retirees would have to be sacrificed—and their tolerance for risk challenged—for the good of big-time economic actors who could continue to borrow and spend.

The Unintended Consequences for Retirees

It’s critically important to understand how bank policies and actions can adversely affect retirees. Under an economic system fueled by credit, the US and its citizens are indebted like never before. As of 2016, total government and personal debt stood at $33 trillion, most of which was accumulated over the last forty years. In 1980 the debt aggregate was about $3 trillion, of which government debt stood at less than $1 trillion. Today, the US national debt stands at [$22 trillion at the time of this posting] after almost doubling over the last eight years alone. According to the US Department of the Treasury, at the current rate, federal debt could double to $40 trillion by 2030—assuming that trillions in private and government pensions don’t implode and need to be bailed out by the federal government, thereby taking on even more debt in the process.

According to MarketWatch, by the end of 2016 Americans carried more debt (including consumer debt, mortgages, auto loans and student loans) than before the financial crisis. As US incomes have remained stagnant for decades, we’ve substituted debt for earnings in what some have come to call “debt-serfdom.”

How might all this debt affect you? First, you may carry mortgage or educational debt (your children’s or grandchildren’s) and/or consumer obligations into retirement. Second, you may have to contend with a significant rise in the real cost of living during your retirement years, an inevitable byproduct of the Federal Reserve’s tireless money creation. Third, as a saver, the Fed’s zero-rate policy will challenge you to earn a safe return on your cash. Finally, as an investor, you may face decades of low returns—nominal and real— driven by slow growth in the underlying economy and exacerbated by a little-understood process known as “financial repression.”

The bottom line? Investors need to recognize the potential risks imposed by a banking culture that serves its own purposes, but that is not particularly focused on the needs or future wellbeing of America’s retirees.

Chapter 5 Takeaways 

  1. In today’s financial world, bankers serve government borrowers, with both borrower and lender believing that national economic wellbeing depends on their collaborative market interventions.
  2. As credit-issuers, the banks serve as intermediaries that leverage fractional reserves to stimulate economic activity by literally creating money through the lending process itself.
  3. The Federal Reserve System, our “central bank,” was established in 1913 to mitigate liquidity pressure on banks. After 10,000 banks still failed during the early phase of the Great Depression, the Federal Deposit Insurance Corporation (FDIC) was introduced to serve as an additional layer of depositor protection to tamp down the public’s tendency to panic.
  4. Some of the unintended consequences of modern banking practices include wealth inequality, monetary inflation, excessive debt burdens on households and governments and manipulated rates that favor borrowers at the expense of savers.
  5. While the Fed sees its mandate today as protecting the international strength of the US dollar and interacting with our economy to help it achieve full employment and broad-based prosperity, our banking system does not shoulder a specific mandate to provide financial security to America’s retirees and, in fact, some of its actions may actually prove inimical.

###

If you would like to discuss your personal retirement situation with author Nahum Daniels, please don’t hesitate to call our firm, Integrated Retirement Advisors, at (203) 322-9122.

If you would like to read RETIRE RESET!, it is available on Amazon at this link: https://amzn.to/2FtIxuM

 

What I Wrote In Chapter 3 of Retire Reset!

 

by M. Nahum Daniels

 

If you’ve been wondering about the book I wrote, RETIRE RESET!, we are publishing some excerpts right here on our blog so that you can learn more. Along the way, you will learn why our firm, Integrated Retirement Advisors, was founded: we’re on a mission to help people with retirement!

Here are some excerpts from Chapter 3.

 

Chapter 3: TIME IS MONEY

Retirement clock management begins with the very first questions posed in the planning process: “When can I (afford to) retire? Can it be sooner, does it have to wait until later or will it be never? And by the way, how long should I expect my retirement to last?”

When a husband and wife aged 65 first visit with me and they’re in reasonably good health, I have to inform them that, statistically, one member of the pair (usually the female) has a 50% chance of making it to age 94 and a 25% chance of making it all the way to age 98. And if she makes it to 98, she has a 50% chance of making it all the way to triple digits, because actuarial science informs us that the longer we live, the better our odds of further survival.

When urging clients to get proactive about their long-term financial planning, I often relate the remarkable story of Dr. Ingeborg Rapoport. It brings home not only the indomitable power of the human spirit, but also the truly amazing advances in human life expectancy that have been achieved over the last century—and continue to be made with increasing velocity.

Dr. Rapoport had already been retired for thirty years when Hamburg University authorities finally gave her a chance to complete her doctoral degree—but only after following all the rules. She would have to stand for an oral exam, questioned face to face by a panel of academics, to defend her original dissertation on diphtheria. The dissertation had been well received when she first submitted it at the tender age of 25, but she was blocked by the Nazi regime from completing the process because her mother was Jewish. Although she went on to enjoy a professional career in neonatal medicine she always felt unfairly deprived and, after 77 years, wanted to right what she felt was an injustice.

Now nearly blind, it was only with the help of friends that she was able to catch up on developments in diphtheria studies during the intervening decades. Dr. Rapoport passed her exams with no age-based indulgences and was finally awarded her degree in 2015, becoming the oldest person ever to be awarded a doctorate, according to Guinness World Records. She was 102.

And that’s the point: Underlying successful retirement planning at any age today is an appreciation of contemporary developments in longevity. No matter your starting point, if you’re in reasonably good health you’re advised to play the long game.

 

Most retirees are naively complacent about longevity risk

The wealthier and better educated the individual, the more life expectancy improves. If, as frequently happens, one spouse turns out to be 10 years younger when the primary earner reaches full retirement, then to be prudent we should be planning for a 45-year joint cash flow—ideally adjusted for inflation to preserve its purchasing power.

Portfolio design follows on from that core purpose. Thus, our first objective is to figure out how to guarantee a lifelong cash flow to replace previously earned income in amounts sufficient to match your expenses.

In an inflationary environment, time reduces money’s worth and therefore accelerates its use. In a deflationary environment, time enhances money’s worth and defers its use to another day when it will buy more. The longer the time horizon in which these forces play out, the more pronounced the antagonistic outcomes. Thirty years of inflation at 3% results in a 60% loss of buying power; three decades of compounding 3% interest can produce a 140% increase in buying power. That’s a 200% spread, making this a battle that is absolutely worth fighting.

 

Sequence of returns risk

If you think that an “average return rate” tells you anything about retirement investing, you haven’t seen the effect that sequence of returns can have on a portfolio.

 

Figure 10 illustrates S&P 500 total returns generated over the 20-year period from 1989-2008. The average return over the period was 8.43%. The first thing to notice is that no single year actually produced a return equal to the average; returns ranged from losses as great as -37% to gains as high as +38%. If we reverse the sequence, the average annual return remains the same.

Figure 11 shows what happens when a retiree starts pulling money out of their portfolio at a rate of 5% per year for retirement income. The clockwise sequence (based on S&P 500 from 1989-2008 from Figure 10) left a theoretical retiree with a $3.1 million asset pool at the end of twenty years available for spend-down over the next 20; the counter-clockwise sequence would have left the same retiree with a miniscule $235,000 that would have to be stretched over a decade or two!

 

Chapter 3 Takeaways

  1. Retirement planning starts with assuring that your nest egg (with or without inputs from other income sources) serves as a personal pension guaranteeing you the paychecks you’ll need for 30-40 years after you stop working.
  2. As an investor, you need to understand that time is of the essence and that playing the long game means hedging against numerous long-term cyclical risks decades in advance of their possible impact.
  3. Once you begin to spend down, retirement success depends more upon the sequence of returns you earn than the annual magnitude of those returns.
  4. To make your nest egg last for the long run, best practice is to focus on avoiding sharp losses rather than seeking high returns.
  5. True compounding will yield a more predictable outcome than the generation of random market returns that can offset each other, reduce the net result to zero (or less) and waste your precious time.

###

 

If you would like to discuss your personal retirement situation, please don’t hesitate to call our firm, Integrated Retirement Advisors, at (203) 322-9122.

 

If you would like to read RETIRE RESET!, it is available on Amazon at this link: https://amzn.to/2FtIxuM

 

 

Rethinking Your Retirement Investing To Hedge Against A Market Downturn

 

Rethinking Your Retirement Investing To Hedge Against A Market Downturn

Studies show most Americans aren’t saving enough for retirement. A recently-released World Economic Forum report warned that most retirees risk running out of money as much as a decade before death. And the anxiety of being ill-prepared for the golden years can grow when portfolios do not, leading some advisors to recommend over-weighting stocks to provide the impetus for long-term growth.

Retirement planner Nahum Daniels thinks the risk-reward trade-off of investing a retirement nest egg in stocks and bonds can result in even more worry. And, given a bad sequence of returns -coupled with the fact that people are living longer than in previous generations -many retirees could run out of money faster.

“Psychologically, we’ve grown confused about the financial dynamics of retirement,” says Daniels (www.integratedretirementadvisors.com), author of Retire Reset!: What You Need to Know and Your Financial Advisor May Not Be Telling You. “Since the early 1990s, when the 401 (k) replaced the defined benefit plan in corporate America, there’s been a fundamental shift in perception. When retirement was pension-based, planning was about guaranteed income and the employer had to keep the promises it made. Today, participants in 401 (k) plans have to know about stocks, bonds and ‘Balanced Portfolio’ management because they’re responsible for their own unpredictable outcomes.

“Ironically, centering a retirement portfolio on Wall Street’s securities-driven risk/return tradeoff may actually be a formula for an even more insecure retirement. The reason is the cyclical volatility inescapable in equity markets. Nor are bonds immune from losses: The Fed’s rate manipulations, coupled with our nation’s current $75 trillion debt overhang, introduces an abnormally high level of volatility to bond prices. The real crisis in retirement planning is not just our savings shortfall but our misguided mindset; we need a perceptual shift about what our real goals are and a tactical reset to reach them.”

 

Daniels offers four principles to reset a retirement portfolio and hedge against a market downturn:

  • De-risk. Whether in the accumulation or spend-down phase, the retirement nest egg cannot afford market losses without eventually paying out less. “Insulate your nest egg from them and guarantee the outcome when you can,” Daniels says. “It’s unnecessary to resign yourself to self-imposed austerity to accommodate market volatility.”
  • “Size your nest egg as efficiently as possible by optimizing the sustainable yield it can generate,” Daniels says. “Work it back from your income need. For example, if your nest egg supports a withdrawal rate of 5 % rather than 3%, you can achieve your goal with 67% less capital.”
  • Daniels says the latest academic research favors the integration of actuarial science with investment expertise in the construction of a “stable-core” retirement portfolio. “Longevity insurance has a heightened economic value in an era of open-ended life expectancy,” Daniels says, “while historically no asset class beats equities for long-term growth potential. Balancing the two is key to getting the best result and hard-boiling the nest egg.”
  • “Today’s fixed index annuity (FIA) lends itself well as the actuarial component of a retirement nest egg,” Daniels says. “Anchoring a stable-core portfolio to it can protect against market declines while still participating in a needed share of upside potential.”

 

“Buying and selling securities at all the wrong times can increase the odds that you run out of money,” Daniels says. “Retirement investors need a form of protection that can keep them invested without costing so much that it devours their return in the process.”

 

About Nahum Daniels

Nahum Daniels (www.integratedretirementadvisors.com) is the founder and chief  investment officer of Integrated Retirement Advisors, LLC. He is the author of Retire Reset!: What You Need to Know and Your Financial Advisor May Not Be Telling You. A Certified Financial Planner and Retirement Income Certified Professional, Daniels has served mature investors for over 30 years.

Retirement Guidelines for Millennials

Millennials looking to retire at age 65 have thirty to forty years to prepare and another thirty to forty years to provide for.  Here are some guidelines we use in our practice:

 

Acquire discipline: set aside 10% of disposable income to the retirement nest egg.

Open your eyes:  Retirement investing is intended to ultimately generate decades of income in the distant future to sustain unprecedented longevity.

Learn patience: the nest egg should be “put to work” by compounding consistent gains; aim strategically for singles and doubles rather than swinging for the bleachers.

De-risk:  Market volatility and realized losses, especially early in the accumulation or spend-down phase, can undermine the best-laid plan and the ability of the nest egg to achieve its long-term income objectives, so avoid them.

Seek shelter: The retirement portfolio should be insulated from rising taxation, the most consistent drag on growth especially for Millennials who may face higher taxes than their forebears.   It should therefore be “nested” in IRAs, Employer qualified plans, deferred annuities and cash value life insurance to provide the needed tax shelter.

Hedge:   Invest the nest egg for the long term insulated from downside risk but positioned to share in the market’s upside potential.

Diversify:  Another key to long term investment success, diversify across asset classes in terms both of tactics and strategy.

Think outside the box:  Explore the economic advantages offered exclusively by actuarial science rather than limit yourself to conventional stock-and-bond investing.

Integrate:  learn how next-gen longevity insurance can complement securities in a retirement portfolio to achieve more predictable results.

Consider the alternative:  Evaluate the multi-faceted fixed index annuity (FIA) and the role it might uniquely play as a retirement portfolio’s stable core.

 

What Is An Annuity?

An annuity is first and foremost a stream of payments.  For most retirees, the payor is an insurance company.  Properly regulated, an insurer can “guarantee” the payments it promises; in fact, if an insurer gets into trouble, annuitants in payout status are considered senior creditors, i.e., they get paid first—even before the rent.

Annuities can pay for a specified number of years or for a lifetime or two, which given today’s extended life expectancies, can be open-ended.  Today’s extended life expectancies gives actuarial science enhanced economic value when it comes to providing a return on investment:  an annuity can yield more from the get-go if average life expectancy is assumed while the longer an annuitant lives, the more payments received, the greater the IRR.  So annuities are best purchased by people expecting to live into their nineties– or even beyond—who don’t want to worry about running out of money no matter how long they survive.

In a traditional fixed annuity, the insurer invests in mostly investment-grade fixed income instruments to match its assets to its liabilities.  Based on its projected earnings (usually reflecting the yield on the US ten-year Treasury) and its projected expenses, it shares the blended yield on its portfolio holdings with the annuitant, paying a fixed return for the guaranteed duration.  The purchasing power of that fixed return will be eroded over time by inflation, which is a key drawback to this structure.  The payout, however, remains unvarying, unless you buy an inflation “rider” which increases it year to year based on some measure, but inflation riders tend to be expensive and depress the initial payout level.

A variable annuity also offers an income that will never run out, but the insurer invests the policy-owner’s premium in equities.  The objective is to generate a higher level of income over time, but the income payout is subject to market risk and can either increase or decrease from year to year.  The potential to decrease—possibly requiring “belt-tightening” and a reduced lifestyle that can end up being permanent—is the biggest drawback to this structure.  A poor sequence of market returns can end up undermining the income floor most annuities are intended to provide.

The fixed index annuity is a relatively new hybrid.  Like a fixed annuity, it guarantees an income floor from inception.  But unlike a traditional fixed, its earnings are linked to one or more market indices and those earnings can be applied to the annual income payout to establish a higher floor from year to year.  If markets are favorable, the annuity income can increase and those increases are rendered permanent; unlike a variable annuity, the income yield doesn’t suffer even if markets have a bad year or two.

The older an annuitant, the higher the initial payout of any income annuity.  So the traditional fixed can be very advantageous for retirees in their 80s.  They should shop for the highest payouts being offered by the better-rated companies and consider a portfolio approach.  The deferred fixed index annuity lends itself well to investors approaching or just entering retirement, say between ages 55 and 75, aspiring to give inflation a run for its money over the long term without taking a hit on the initial payout once begun and risking income reductions if markets decline.

Retiring at 45, the opportunities and the pitfalls

 

 

Even retiring in our mid-sixties today poses unaccustomed challenges revolving around our unprecedented longevity–the increasing odds that we might live deep into our mid-90s or even beyond–and our psychological tendency to electively compromise our lifestyles once we stop earning income out of fear of spending too much too soon and running out of money.  So if a thirty-year retirement is bedeviled by these factors, think about a 50-year period extending from age 45!

 

It’s crucial for anyone seriously contemplating early-retirement to make a study of the complex psychological and financial dynamics involved, or work with an advisor who has.  Most of us don’t know what we’re up against in modern retirement, and that goes for untrained financial professionals as well as clients.  True, it’s an opportunity for extraordinary self-realization but it’s also rife with the risk of financial ruin no matter how much money we may start with.

 

The “early retirement” planning process really needs to start at the “back end” with a vision of the lifestyle desired.  A new profession of retirement coaching has emerged to assist people in finding meaning in retirement no matter when it might start.  I call this aspect of retirement planning its “soft” side to distinguish it from the financial dynamics; I refer to them as retirement’s “hard” side.  The two are intertwined.

 

The process of planning a meaningful retirement isn’t “one size fits all ” In financial terms retirement can come in small, medium and large.  How much you’ll need to accumulate, and in what vehicles, will be determined by the cash flow you’ll need to sustain your envisioned lifestyle.   Is your goal to escape the grid and live the single life of adventure or is it to be a high-profile head of household educating your children and practicing communal philanthropy to make the world a better place?  It’s essential to start with your vision of a meaningful life freed from the need to work and earn.  Keep In mind, though, that “meaning” can be expensive to sustain.

 

Obviously, living on $50,000, adjusted each year for inflation, requires a much smaller nest egg than living on $500,000 or $5 million.  Once you settle on the cash flows you’ll need, you can size the income-producing nest egg required and focus on its core portfolio construction. The more income you can generate from your nest egg–the higher its yield and the more reliable its duration–the more efficient its construction can be and the less capital you will need to get the job done.  This frees up other capital to satisfy your risk appetite or philanthropic intent.

 

To retire early you will want to start saving and accumulating whatever capital you will need as soon as you have a clear vision and a declared objective.   If it’s to last a lifetime, the nest egg needs to be de-risked to avoid untimely market losses that could prove hard to recover.  Better to position your income-dedicated retirement portfolio to compound safely over time.  Smoothing returns and avoiding losses is key to portfolio design; we believe you should look for financial instruments that can guarantee the outcome.  Next-gen longevity insurance can play a stabilizing role in the nest egg.  Linked to the underlying markets, Its new varieties offer downside protection together with a reasonable share of upside potential both before and during retirement.  We use them extensively in constructing our “stable-core” retirement portfolios.

 

That’s because losses incurred in retirement planning can undermine even the most consistent effort.  Market risk should be hedged and minimized if not totally avoided.  Taking on uncompensated risk is anathema.

 

In fact, retirement at every stage is an exercise in risk management.   Risk sensitivity is accentuated the earlier you start and the closer you get to the goal line.

 

Avoiding depletion is like walking a tightrope.  Success is not dependent on how much wealth you start with; it’s more a factor of the ratio of your spending in retirement to your dedicated retirement capital.   Study the concept of the “safe” withdrawal rate and figure out a way to exceed it without prejudicing your ultimate success.  Getting good advice on how to do that may even be worth paying for.

 

Unless your income goals in retirement are modest, it’s hard to save enough out of one’s wages to build an adequate nest egg no matter how early you start, especially if you have a spouse and family to feed, house, clothe and educate.  Starting a successful business or owning shares or stock options in a start-up that ultimately gets acquired or goes public are more often the sources of wealth creation among age-45 retirees.  A carried interest in a real estate or financial firm—a share of the profits—can be another path to early riches.

 

Ironically, while risk taking is often the source of early-retirement wealth, the nest egg itself should be hedged and protected.  In our practice we go further and recommend insuring it for higher initial yield and longevity guarantees that can survive an individual issuer that may go under.

 

Retiring early only accentuates this ever-present dialectic that characterizes a retirement that, if starting at 45, can last far longer than your work life.

 

Retirement Investing For Entrepreneurs

 

Entrepreneurs are risk takers by nature; most swing for the fences in their chosen enterprises.  Most fail once or twice before succeeding.  Many businesses fail even AFTER having succeeded.

Retirement savings need to be approached differently. 

  1. The retirement nest egg should be fed starting as early as possible and should be focused on steady growth with downside protection.
  2. If started early enough and insulated from losses, even 10k per year can compound into a significant portfolio over time.
  3. Not sufficiently appreciated, life insurance is an ideal retirement tool for entrepreneurs under 50. Even older under certain circumstances.
  4. Investment-oriented life insurance compounds with doubled-up vigor by benefitting from the tax-avoidance features it offers; all internal growth is tax-deferred.
  5. In addition, life insurance offers tax-free access to gains in the form of policy loans, usually of the “wash” variety. This turns a life policy into an unlimited Roth IRA.
  6. The Fixed Index Universal Life (FIUL) policy offers the greatest growth potential; some varieties offer extraordinary loan features.
  7. Based on today’s tax regime, nothing beats the retirement funding potential of this financial instrument; what’s more, being tax-free on the payout side takes the recipient off the grid. The cash flow from this source is non-reportable.
  8. The instrument also serves the traditional family protection needs met by life insurance.
  9. It can also serve business needs: funding deferred compensation arrangements; buy-sell agreements with partners and co-shareholders; and key-person coverage to protect the on-going viability and on-going-concern value of an enterprise.
  10. Thus, retirement planning should be built into the wide array of planning needs unique to entrepreneurial endeavor.

 

Ask us for examples and stories from 30 years’ experience working with small business owners available.