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Thursday July 9, 2015

The Business of Risk

Cyber threats have created an interesting conundrum in which the criminal perpetrators are frequently more tech savvy than those responsible for preventing their crimes or apprehending them. And the situation, at the moment, doesn’t really show signs of improving.

Several national security experts recently issued recommendations to help address the problem. They referred to the issue as a “black elephant — a dangerous crossbreed between the ‘black swan’ risk (capable of producing unexpected outcomes with enormous consequences) and the ‘elephant in the room’ (a large problem that is in plain sight).”

[CLICK HERE to read the article, “We Don’t Need a Crisis to Act Unitedly Against Cyber Threats,” from Knowledge@Wharton, June 1, 2015.]

[CLICK HERE to read the article, “RSA Conference: Is Hiring Hackers a New Thing?” from Adeptis Group, May 6, 2015.]

[CLICK HERE to read the article, “Security Companies Hire Hackers, Ex-Spies to Fight Cyber Attacks,” from Bloomberg, April 14, 2015.]

While hackers certainly present a grave risk at the national level, frequently the outcomes are more personal. Sure, it’s a real blow to companies like Target and Home Depot for their data to be hacked, but ultimately it’s their customers who may suffer more relative damage.

And as great as technology is, the more we integrate it into our lives, the more risk we face of being personally “hacked.” For example, what a wonderful convenience to be able to lock and unlock our homes and cars using our cellphones, even when we’re out of town. But consider the benefit to a criminal who hacks into a person’s phone and unlocks the house and car, making for easy theft while knowing the owner isn’t home. It kind of makes the old-school, trusty German shepherd seem a bit more attractive for warding off potential burglars.

[CLICK HERE to read the article, “Data breaches may cost less than the security to prevent them,” from TechRepublic, April 9, 2015.]

[CLICK HERE to read the article, “Black Hat 2014: Security experts hack home alarms, smart cars and more,” from CBS News, Aug. 6, 2014.]

Then there are the security breaches that don’t make the headlines. For example, a data breach at a local vendor that results in unauthorized charges to your bank debit card, PayPal account or other online vendor. These sporadic incidents can range in damages from a minor inconvenience to lost hours trying to identify the issue, resolve it and get your money reimbursed.

Naturally, it makes sense to protect your own data as much as possible instead of relying solely on vendor and government solutions. For example, experts recommend using a credit card instead of a debit card. Relevant to this advice, it’s a good idea to revisit any of your accounts where you may have entered your bank account or debit card information, even if you only use your credit card with those accounts. Consider what card information is stored at accounts such as Amazon, eBay, Etsy, PayPal, Netflix and other online merchants you might frequent.

And with another nod to the old-school approach, consider using cash instead of credit at places where they habitually take your credit card out of sight for a few moments (long enough to record its information) — such as at restaurants and fast-food joints.

[CLICK HERE to read the article, “7 Reasons Your Debit Card Makes You a Target for Fraud,” from, Oct. 22, 2014.]

[CLICK HERE to read the article, “New ways to prevent credit-card fraud,” from Consumer Reports, May 28, 2015.]

One thing we’ve learned throughout history, no matter the threat, is that the best time to prepare for a disaster is before it occurs. This applies not only to cyber threats, but to health care screenings and creating a plan for retirement security. The more we educate ourselves and the more we plan, the more prepared we are when something unexpected occurs.

We are here to help you feel more confident in your financial strategy — now and in the future. Please give us a call at 770-778-5242 or at:

We are an independent firm helping individuals create retirement strategies using a variety of investment strategies and products to custom suit their needs and objectives.

This content is provided for informational purposes only. It is provided by third parties and has been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. If you are unable to access any of the news articles and sources through the links provided in this text, please contact us to request a copy of the desired reference.

Saturday July 26, 2014

Retirement Income Planning: Systematic Withdrawal or Income Flooring

This is a recent Retirement Income Planning case in which we weighed the pros and cons of a Systematic Portfolio Withdrawal Strategy and an Income Flooring Strategy for a client.

Here are Case Parameters:

Client – Jane Doe; Age 62; Female; Divorced

Income: $85,000; Self-employed professional; and plans on working until Age 70

Social Security Claiming Strategy: Will defer her Social Security to age 70; taking Spousal Benefit at Age 66

$300k – Traditional IRA

$100k – Roth IRA

$64k – Deferred Fixed Annuity Balance with a guaranteed 4% interest rate.

$100k – Cash / Savings

Monthly Discretionary Income ≈ $2,000 (spousal support payment amount)

These are the goals Jane wants to accomplish:

  1. Retirement at Age 70 with a total Monthly Income of $5,000 per month, adjusting for inflation.  This would require approximately $6,100 each month by age 70.
  2. Address future Long Term Health Care needs. Jane doesn’t want to buy a traditional LTC Policy, but would consider repositioning some of her IRA’s for potential LTC benefits.
  3. Jane wants to maintain an inflation adjusted income for her lifetime and wants to plan for a time horizon of age 95. She has a family history of longevity and wants to plan accordingly.
  4. Keep enough Cash for any emergencies or whims.
  5. Apply $1,500 of her Monthly Discretionary Income to a combination of a SEP-IRA and a new Roth IRA. Jane isn’t ready to commit this monthly amount (but easily could). If she did save this amount through retirement at age 70, there would be another $150k+ of assets at her disposal. Until this savings habit begins we will not use it in our projections.

Here’s what we did to address Future Long Term Care Needs and Liquidity:

  1. Roth IRA – $100k; Position for Home Care or Long Term Care in either:

a.  Fixed Index Annuity with an Income Rider that doubles for Home Care or Confined Care

b. Keep in an Investment Portfolio and dedicate this account for future LTC needs.

The Roth IRA payouts will always be tax-free, no required age for beginning distributions.

2.  Cash / Savings – $100k.  Leave $50k in Cash; Invest $50k over the next 2 years into Index ETF’s.

Jane will most likely buy a new car and/or put a down payment on a home within 5 years. This is where she’ll   be able to get those funds.

These arrangements took $200k off the planning table, leaving only the Traditional IRA balance of $300,000 to apply for the future income requirements.

Jane has to begin Required Minimum Distributions at age 70 ½, this coincides with her planned retirement date and beginning her deferred Social Security benefits.

After totaling Jane’s expected income from Social Security and assuming a 5 year payout from her existing Deferred Annuity, we determined that from age 70 thru 75 she would need to withdraw $17,500 each year from the IRA. The Cash and Investment balances are available if needed.

At Jane’s age 76 – The Deferred Annuity payout has ended, the annual required income withdrawal now becomes $38,000, adjusting at 3% annually for inflation.

The two ways we analyzed the lifetime sustainability of this $300,000 portfolio were the Systematic Withdrawal and Income Flooring methods.

The Systematic Withdrawal method involves taking the entire amount and investing in a diversified portfolio of stocks and bonds and withdrawing each year a specific dollar amount or percentage of assets. The annual withdrawals would increase each year by your assumed rate of inflation.

The Income Flooring method takes the approach of determining how much investment is needed to buy the desired amount of future income. This sets the income base to a level at which it can never fall below. This is typically done with Treasury Inflation Protected Securities (TIPS), bond ladders, or Annuities with Lifetime Income Riders.

The Results:

  1. Systematic Withdrawal – Assuming the $300k were invested today throughout retirement in a 60% Stock 40 % Bond Portfolio. We performed Monte Carlo simulations which puts the portfolios through 1,000 random scenarios to test the probability of lifetime success.  We began withdrawals of $17,500 per year from age 70 – 75. We increased income to $38,000 at age 76 throughout life expectancy, adjusting by 3% annually (our CPI inflation assumption).
  • There was a 0% probability of success that the portfolio would last Jane’s lifetime with her required rate of income. The median age at which the portfolio fails is 82.
  • Increasing the portfolio’s stock allocation to 80% boosted the long term return and success rate to 46%. The median age at which the portfolio fails is 86.
  • For a success probability of 90% or more an initial investment portfolio of approximately $1,000,000 would be required. That’s nice, but we still only have $300k to work with.

Using an aggressive portfolio allocation for the $300,000 investment today, Jane has a 54% chance of fully depleting these funds by age 86. The more conservative allocation gave a 0% chance of success past age 82.

  1. Income Flooring – the $300,000 was not enough to buy TIPS or a bond ladder to get the required income. A Fixed Index Annuity was chosen that had a Lifetime Income Rider that provides an annual income increase based on the Consumer Price Index (CPI) inflation rate.

The annuity’s rate of return is based on whatever market indexing strategy is chosen. The annuity’s earnings in negative market periods will be $0. For this illustration the assumed return was 6.54% using a 30 year backcast.

  • We took $17,500 per year for the first 5 years; this satisfies Jane’s Required Minimum distributions and doesn’t initiate using her Lifetime CPI Income Rider. Combined with her Social Security Jane’s income is $5,788 per month or $69,456 per year. Cash and other Investments are available for any shortfalls.
  • At Age 76 we began her Lifetime Income Rider. This pays $3,129 per month. Combined with her Social Security this puts Jane’s income at $6,191 per month or $74,292 per year.
  • Her income sources (Social Security and IRA) both get annual CPI-based increases throughout her lifetime. Her combined income at age 85 would be ≈ $7,368 per month or $88,416 per year.

The total beginning income amount using Income Flooring at age 70 ($5,788) is about $400 per month less than Jane’s desired beginning amount of $6,100. But she still has Cash, Investment, and Roth IRA balances to offset any shortfall.

The Fixed Index Annuity actually runs out of Account Value at Jane’s age 88, which is about her normal life expectancy. This means she has no account balance left to access. Because this is a Lifetime Income Rider, the issuing company is contractually obligated to continue paying income (with CPI increases) for Jane’s lifetime.

How the annuity continues paying income when it’s out of money is because Jane and all the other annuity holders of the issuing company are lumped together in an actuarial mortality pool. For every one that lives past life expectancy, there are many others that don’t. Thus the risk of the potential lifetime income payments is spread among the total pool of possibly millions of other people. And of course, the issuing company has to make a profit on this actuarial arbitrage, otherwise they wouldn’t offer these products.

The Systematic Withdrawal strategy would most likely be the one chosen if Jane had $1,000,000 or more that she could dedicate for this. It would allow greater access to her funds and more spending flexibility. But we’re beginning with $300,000 and we won’t hit her numbers with 300k.

For Jane, the choice of the Income Flooring strategy is going to be the most logical course. It eliminates the possibility of outliving her income and builds in inflation protection. The annuity company assumes the risk of Jane’s potential longevity.

For most people that have accumulated a modest nest egg, can’t stomach the possibility of running out of income or having to someday reduce their lifestyle, the Income Flooring strategy will usually provide for the greatest assurances of lifetime income.

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Tuesday June 24, 2014

Retirement Income Planning – How to Make Your Assets Last a Lifetime

The most pressing concern in Retirement Income Planning today is: “Will my assets last the rest of my lifetime?” The fear of dying, which was once the greatest fear of retirees, has been replaced by the fear of dying broke. The prospect of outliving your money and existing your last years in a less than adequate or dignified manner is terrifying for all but those affluent enough for it not to be a concern.

For those retirees who were always in the lower earning strata during their working lives this isn’t as big an issue as it is for those that were middle to upper income earners. The lower wage earners have been used to living a very modest lifestyle and Social Security will replace a much greater percentage of their working income.

Baby Boomers who were in the middle to upper middle class of earners during their careers have much tougher decisions to make about how to stretch their Retirement Plans, investments, and savings through their remaining lifetimes. There are certain expectations this group has of retirement, e.g. – maintain their current level of spending, travel and leisure activities, gifts to children/grandchildren, etc. All this while life expectancies are steadily increasing.  Couples who retire between ages 60 – 65 have a greater than 40% chance of one of them living to age 95 or longer. Social Security usually may replace less than 25% of their pre-retirement earnings.

The choices made about what to do with 401(k)’s, IRA’s, investments, and savings will be the difference between living well not just in the early active years of Retirement, but in the years of declining health when it’s most important.

First, one has to be realistic about what they expect from their various Retirement Income sources. If you have $500k in a combination of Retirement Accounts, investments, etc., and want to draw a $40,000 annual lifetime income from that – plan on running out of money by around age 80. Several of my clients listen to Dave Ramsey who has said on his radio show and on his website that one should expect a 12% average lifetime return on their mutual funds and be just fine taking out at a rate of 8% forever. This is poison for people who really expect this to happen.  See this recent article: . Especially so when the actual 15 year average return on the S&P 500 Index is 2.56% and the 15 year average return on the Total US Stock Market is 4.74%. See here for those numbers:;range=my

There are three common schools of thought about how to position assets to last a lifetime:

  1. Systematic Withdrawals using a Safe Withdrawal Rate (currently between 2.8% – 4%)
  2. Segmenting your portfolio for different stages of Retirement – Matching assets to time periods.
  3. Flooring your income with a portion of assets in Annuities or Treasury bonds, and investing the rest for growth. Guaranteeing the lifetime coverage of basic living expenses and taking discretionary spending from the investment portfolios.

What’s best for each Retiree’s situation depends on a lot of variables and their expectations and assumptions about things like risk, longevity, and health.  Many times these strategies can all be used at the same time for a client – segment some assets for certain spending goals, set up a pension-like income base that lasts for one or both lifetimes, and then having your various investments to use when needed.

Retirement Income Planning is becoming the most requested specialty of advisors in the financial planning business. Thirty years ago people wanted to know the “hot stock tips”, 20 years ago they wanted to avoid Estate Taxes, now Baby Boomers just want to know how to live a potential 35+ years and maintain a lifestyle without going broke or depending on their kids.

When you are interviewing or considering which advisor to use – look for the RICP® Designation. Retirement Income Certified Professionals, myself included, have met stringent requirements and coursework dealing with all aspects of Retirement Income Planning, Social Security strategies, Income Distribution planning, Taxation, Long Term Care, Medicare, elder living arrangements, and Retirement Portfolio sustainability.

Are YOU Ready to Retire? Find out with this interactive quiz:

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Wednesday June 18, 2014

Case Study – Early Retirement Plan Distributions – When Does it Make Sense?

When Does it Make Sense to Take Retirement Plan Distributions Before You Have to?

The primary reason one takes Retirement Plan Distributions prior to the mandatory age of 70 ½ is financial necessity. The distributions are needed to supplement income and cover one’s basic expenses. I will not be discussing that situation in this post. I will be covering the situations in which the person or household has the resources and income to cover their lifestyle without dipping into their retirement savings until the Required Minimum Distribution age mandates they do so.

In this example I will be using an actual client case in which the individual retired quite early (age 55) with sufficient income streams and a relatively large amount in Qualified Retirement Plans – Pension, 401(k) – and substantial cash savings.

Here is the scenario:

  1. Client is age 59 1/2, his spouse is 58. His Company downsized him and many of the higher paid senior and mid-management employees 4 years ago. They will continue to pay for his family’s major medical insurance until his age 65. His wife worked enough over the years to qualify for Social Security but was primarily a homemaker during this time.
  2. There is 1.2 million in his Retirement Plans – 900k in a 401(k) and 300k in a Pension Plan.
  3. There is 700k+ Cash Reserves in CD’s and Money Market accounts.
  4. They own 3 annuities totaling $330,000. We determined that it would make sense to annuitize one with a balance $143,000 to pay out over 11 years at $18,000 per year (mostly tax free return of principal) to supplement income and avoid using their Cash Reserves. The 11 year payout period was set to end with the Client’s attaining 70 ½ when he must begin taking Required Distributions
  5. A Social Security Analysis was performed and determined that he would defer his SS Benefit until age 70 in order to leave his wife with a much larger monthly benefit after his death. She will begin her SS at age 62, switching to Spousal Benefits at age 69. He will take a Spousal Benefit at his age 66 (½ of his wife’s benefit amount) and switch to his at age 70.
  6. They have been diligent with their debts, all mortgages and other loans have been paid off.
  7. They own 4 rental properties from which they receive $36,000 per year in rental income. Their income needs are modest at around $50,000 per year.
  8. The wife just inherited an IRA from her deceased father and is taking the distributions over 5 years – $28,000 per year.
  9. With the tax deductions available from the rental properties and other itemized expenses – depreciation, maintenance, insurance, taxes, charitable donations, etc., their Adjusted Gross Income is only $48,000 per year. This places them in the 15% Federal Tax Bracket.

His Retirement Plan Accounts – 401(k) and Pension – totaling $1.2 million today will grow substantially between now and his age 70.  He saw no need to take a lot of risk with the portfolios and we rolled the balances into three IRA accounts. $900k was placed into two Fixed Index Annuities with uncapped earnings strategies, but with the guarantee of no losses in down markets. The remaining $300k was invested in the Stock Market in a portfolio of low-cost Exchange Traded Funds representing various market indices – S&P 500, Mid Cap, Small Cap, and International.

We assumed a very conservative overall return on his IRA Accounts of 5% compounded over the next 11 years. This would bring the total IRA balances at age 70 ½ to just over $2 million. The Required Minimum Distribution at his age 70 ½ would be just over $75,000, increasing a bit each succeeding year.

Now let’s look at their Current Income and Tax Brackets.

  1.  At their current Adjusted Gross Income of $48,000 they fall into the 15% Fed Bracket. The 15% Bracket goes up to $73,800 for couples filing jointly before moving to the 25% Bracket.
  2. At 70 ½ the Required Minimum Distribution of $75k+ would effectively use up the entire 15% Bracket. Their additional income from the Rental Properties and other probable inherited IRA’s (from his aged father) would then move those amounts into the 25% Fed Bracket. Of course some of their income is in the 10% Bracket ($18,150), so there would be about $30k in the 25% Federal Bracket. In this I’m making the assumption that their other income remains consistent at about $48,000
  3. Today they have the room to take another $25,800 of income and still remain in the 15% Bracket. $73,800 – $48,000 = $25,800.

Question: What is worth more – $1 taxed at 15% or $1 taxed at 25%. Simple, it’s 85 cents versus 75 cents.

Taking IRA distributions now through age 70 ½ in an amount that lets them fully take advantage of the 15% Federal Tax Bracket makes a lot of financial sense. It’s a guaranteed 10% increase in the value of those distributions.

Taking those distributions now will also lessen the amounts they will be required to take at age 70 ½ by lowering the IRA balances.

Just because they will be taking these distributions of around $25,000 per year for the next 11 years doesn’t mean they will have less Retirement Income later. They can reinvest these distributions into a Growth Portfolio, convert to Roth IRA’s, add to their Cash Reserves, buy cash value Life Insurance, any of which they can use later in a much more tax favored manner.

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