Category Archives: Retirement / Savings Plans

The Case for Universal Life Insurance as a Conservative Investment Alternative

Everything we do in life involves some element of risk.  Some risks are known, and believed to be understood, while others are more uncertain and involve either probability or magnitude that we find difficult to quantify.  When investing, we generally seek to obtain the highest return possible given the amount of risk that we are able and willing to tolerate.  Unfortunately, gauging the degree of risk associated with various investments is not always easy.  Studies have shown that people tend to prefer known risks over unknown risks[1].  In many cases, this propensity, referred to as “ambiguity aversion,” can cause us to overweight or exaggerate risks that we are unable to quantify or that we do not entirely understand.  At the same time, people are prone to downplay risks that are common and familiar, where undue significance may be attributed to our own subjective personal experience (i.e., “I’ve done this for years, and nothing truly bad has happened to me, so it must not be very risky.”).  Taken together, these (often subconscious) biases can prevent us from properly assessing our alternatives – resulting in decisions that are based on perceived risk, rather than actual risk.  Chances are, you know people who are frightened of flying in airplanes but don’t think twice about getting into an automobile, despite statistics that place the odds of dying in a plane crash at 1 in 11 million while the odds of dying in a car crash are (according to some sources) as high as 1 in 5,000.[2] Continue reading

Retirement Decisions: Lump Sums vs. Income Streams

Americans love getting big checks.  The instant gratification of dramatically increasing one’s liquid net worth is far more desirable for most people than the comfortable but far less exciting feeling of getting a check every month for the rest of their life.  Ironically, taking the lump sum option is most often the wrong decision.  People mistakenly believe they can better manage funds on their own than leaving it in the hands of experienced pension managers and insurance companies.  It’s not so hard to understand why people make this choice – if you were 65 and deciding between $500,000 or $3,000/month for life, I think many people would take the lump sum.  Why?  You can buy a house with $500,000, or pay for a college education, or buy a boat, or take many incredible vacations.  However, $3,000 per month doesn’t allow for any of those large and highly gratifying purchases.  That last point is exactly why we want to pass on the $500,000 and take the long-term income stream instead.

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3 Reasons to Rollover Your 401K

I’m a big fan of rolling over 401K plans into IRA accounts.  For many people, a 401K plan will represent one of their retirement income ‘prongs’ along with after-tax savings, pensions, and social security.  Many workers of various ages have money in 401K plans because they’ve learned that salary reductions into 401K plans will reduce one’s taxable income and grow those funds on a tax-deferred basis until those funds are withdrawn during retirement.  It’s a very widely used retirement savings vehicle.  So why not just leave those funds in your 401K if you switch jobs or retire?  I’ll give you my take on this below:

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When Should You Apply for Social Security?

When it comes to the question of Social Security income, the choice looms large. Should you apply now to get earlier payments? Or wait for a few years to get larger checks? The first thing you want to do is consider what you do and don’t know. You know how much retirement money you have; you may have a clear projection of retirement income from other potential sources. Other factors aren’t as foreseeable. You don’t know exactly how long you will live, so you can’t predict your lifetime Social Security payout. You may even end up returning to work again. In terms of your eligibility to receive full benefits, the answer may be found on the Social Security website. If you haven’t already created a profile, you should do that.

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The IRS Recently Announced New Rollover Limitation

What was once allowed is now prohibited – In 2008, an affluent New York City couple made a series of withdrawals and transfers among contributory IRAs, rollover IRAs and non-IRA investment accounts, all with the long-established 60-day deadline for tax-free IRA rollovers in mind. As esteemed tax attorney Alvan Bobrow and his wife withdrew and rolled over a series of five-figure sums within a six-month period, they assumed their actions were permissible under the Internal Revenue Code. In January 2014, a U.S. Tax Court judge ruled otherwise.*

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Why is Generation Y Ditching Retirement Plans Including the 401K?

Most of my clients embrace payroll deduction retirement plans including the 401(k) and 403(b) which offer the benefit of tax deductible contributions and tax-deferred growth. However, once in a while I’ll meet someone who prefers not to participate in these sorts of plans because they don’t like the idea of giving up liquidity until they are much older. Also, tax-deferral still means paying tax when that money is withdrawn, creating a tax headache which often requires careful planning during retirement. According to research firm Hearts and Wallets, short-term goals and financial independence take precedence over traditional tax-deferred retirement savings accounts for many of the more affluent Generation Y investors.*

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An Update on Variable Annuity Pros & Cons

The variable annuity market experienced tremendous growth over the past decade. The introduction of a product which guarantees lifetime income payments while providing the opportunity for market growth was precisely what many investors were looking for. Companies such as Prudential, MetLife, AXA, Nationwide, Jackson, and Transamerica rolled out product after product which generated billions of dollars in sales through financial advisor channels. The purpose of this article is to determine if these products are still working well for investors and to point out the challenges which the current market environment presents to the insurance companies which issue these variable annuity products. In essence, are the product offerings at the current costs worth purchasing? Or should investors be looking at other products and strategies to augment their retirement income?

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Saving for Retirement: The Numbers

There was an article in Financial Advisor magazine this month which talked about how much money people ought to save if they wish to retire comfortably. I’ve found people enjoy these simplified, rule-of- thumb type systems as they allow people to break down complex, hard-to-reach goals into smaller, more manageable pieces. The article suggests that saving 8x your final salary should, along with social security, prevent a situation in which one outlives their assets. Obviously this isn’t an exact science as the retirement picture looks a little different for everybody, but based on standard spending ratios (typically 85% of pre-retirement income will be needed) these numbers should work. The ways in which one may reach such a large lump sum goal will vary but below are the suggested guidelines for doing so.*

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The Variable Annuity Market is Shrinking

It seems like every time I turn around another variable annuity (VA) provider is closing its doors. Sun Life, John Hancock, AXA, Genworth, and ING are among the companies which have either limited new contributions to one of their VA products, taken some other step to minimize exposure to the VA market, or completely exited the market. Meanwhile, that has translated into more premium dollars for big players like Prudential and Jackson National which have increased market share over the past year, according to Bloomberg Financial. The irony here is that VA sales in Q3 of 2011 hit $8.8B which was the highest level since Q3 of 2007.* One would think companies would want to enter this arena and compete for new dollars, not run the other way.

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