Social Security benefits play a crucial role in ensuring a stable and secure retirement. For many retirees, understanding how to maximize these benefits is essential for financial well-being. This comprehensive guide will explore various strategies to help you get the most out of your Social Security benefits, ensuring a safe and secure retirement. We’ll cover the basics of Social Security, when to claim your benefits, secure strategies to maximize them, common pitfalls to avoid, and how to integrate Social Security with other income sources.

Understanding Social Security

Social Security benefits are designed to provide financial support during retirement. The amount you receive depends on your earnings history and the age at which you claim your benefits. The Social Security Administration (SSA) calculates your benefit based on your highest 35 years of earnings. Understanding how your benefits are calculated is the first step in maximizing them.

When to Claim Social Security

One of the most critical decisions you’ll make is when to start claiming your Social Security benefits. You can begin claiming as early as age 62, but doing so will permanently reduce your monthly benefit. Conversely, delaying your claim past your full retirement age (FRA) increases your benefit by 8% per year until age 70.

Full Retirement Age vs. Early vs. Delayed Benefits

• Full Retirement Age (FRA): Your FRA is based on your birth year. For those born between 1943 and 1954, it’s 66. For those born in 1960 or later, it’s 67.
• Early Benefits: Claiming at age 62 reduces your monthly benefit by about 25-30%.
• Delayed Benefits: Each year you delay past your FRA increases your benefit by 8%, up to age 70.

Secure Strategies to Maximize Benefits

To maximize your Social Security benefits securely, consider the following strategies:

Spousal Benefits

Spousal benefits can be a valuable part of your Social Security strategy. If you’re married, you can claim either your own benefit or up to 50% of your spouse’s benefit, whichever is higher. This can be particularly beneficial if one spouse has significantly lower earnings.

Maximizing Survivor Benefits

If you’re widowed, you can claim survivor benefits as early as age 60 (or 50 if disabled). Survivor benefits can be up to 100% of your deceased spouse’s benefit. It’s crucial to understand the rules and optimize the timing to ensure you receive the highest possible benefit. Survivor benefits are designed to provide financial support to widows and widowers based on their deceased spouse’s earnings. Here are the key rules and strategies to maximize these benefits:

Eligibility for Survivor Benefits

Age Requirements:

• Early Benefits: You can start receiving survivor benefits as early as age 60.
• Disability Exception: If you are disabled, you can begin receiving benefits as early as age 50.
• Caring for a Child: If you are caring for a child under age 16 or who is disabled, you can receive benefits at any age.
• Marriage Duration: To qualify, your marriage must have lasted at least nine months unless the death was accidental or occurred in the line of duty (military).

Social Security Benefit Amounts

• Full Benefits: If you wait until your full retirement age (FRA), you can receive 100% of your deceased spouse’s benefit amount.
• Reduced Benefits: If you start claiming before your FRA, your benefit amount will be reduced:
• Age 60 to FRA: The benefit will be reduced to as low as 71.5% of the deceased spouse’s benefit if claimed at age 60.
• Between 60 and FRA: The reduction is less severe the closer you are to FRA.

Maximizing Strategies

• Delay Benefits for Higher Payments: If financially feasible, delaying survivor benefits until your FRA ensures you receive the maximum possible amount.
• Consider Your Own Benefits: If you qualify for benefits based on your own earnings, compare the amounts. You can switch from survivor benefits to your own retirement benefits later if your own benefits would be higher.
• Work and Benefits: If you are under FRA and continue to work while receiving survivor benefits, your benefits may be reduced if your earnings exceed certain limits. Once you reach FRA, your earnings do not affect your survivor benefits.

Coordination with Your Own Social Security Benefits

• Switching Benefits: You can start with one type of benefit (e.g., survivor benefits) and switch to another (e.g., your own retirement benefits) at a later time if it results in a higher overall benefit.

Example Strategy:

• Age 60: Start receiving reduced survivor benefits.
• Age 70: Switch to your own retirement benefits, which will have grown due to delayed retirement credits.

Special Considerations

• Remarriage: Remarrying before age 60 will disqualify you from receiving survivor benefits based on your deceased spouse’s record. If you remarry after age 60, you can still receive survivor benefits.
• Government Pension Offset (GPO): If you receive a pension from a federal, state, or local government based on work where you did not pay Social Security taxes, your survivor benefits may be reduced.

Additional Tips

• Understand Your FRA: Know your FRA for survivor benefits, as it may differ from your FRA for retirement benefits.
• Plan for Long-Term Needs: Consider your long-term financial needs and health prospects when deciding when to claim survivor benefits.
• Seek Professional Advice: Consulting a financial planner can help you navigate the complexities and make the most informed decision based on your unique situation.

Impact of Continuing to Work

If you continue to work while receiving Social Security benefits before reaching your FRA, your benefits may be temporarily reduced. However, these reductions are not permanent. Once you reach your FRA, the SSA will recalculate your benefit to give you credit for the months when benefits were withheld.

Avoiding Common Pitfalls

To secure your retirement, avoid these common Social Security pitfalls:

Timing and Claiming Mistakes

One of the biggest mistakes retirees make is claiming Social Security benefits too early without fully understanding the long-term implications. Claiming Social Security as soon as you become eligible at age 62 might seem attractive, especially if you want to retire early. However, doing so can permanently reduce your monthly benefit by up to 30%. This reduction affects not just your current income but also your financial stability throughout retirement.

Understanding the Impact of Early Claiming

When you claim Social Security benefits before reaching your Full Retirement Age (FRA), which is 66 or 67 depending on your birth year, you receive a reduced benefit for the rest of your life. Here’s a breakdown of how early claiming impacts your benefits:

• Age 62: You can claim benefits at this age, but your monthly benefit will be reduced by about 25-30%.
• Full Retirement Age (FRA): Claiming at FRA (66 or 67) entitles you to 100% of your calculated benefits.
• Delaying Benefits: For each year you delay claiming past your FRA until age 70, your benefit increases by about 8%. This means you could receive up to 132% of your benefit if you wait until age 70.

Strategies to Avoid Early Claiming Mistakes

If you have the financial resources and want to retire before your FRA, it’s crucial to tap into other assets to subsidize the period until you start receiving full Social Security benefits. This strategy not only provides you with the income you need but also results in a significant increase in your monthly Social Security benefits when you do start claiming them.

Using Annuities to Bridge the Gap

Annuities are a popular financial vehicle that can help provide a steady income stream if you decide to retire before reaching your FRA. Here’s how you can use annuities to your advantage:

• Purchase an Immediate Annuity: An immediate annuity provides you with guaranteed income payments starting immediately after you make a lump-sum investment. This income can cover your expenses until you decide to start claiming Social Security benefits.
• Deferred Annuities: You can also opt for a deferred annuity, which begins payments at a future date. This can be particularly useful if you want to delay claiming Social Security benefits for several years to maximize your monthly benefit.
• Bridge the Income Gap: By using the income from an annuity, you can retire early without having to claim Social Security benefits right away. This allows your Social Security benefits to grow, ensuring you receive a higher monthly benefit when you finally start claiming.

Example Scenario

Imagine you’re considering retirement at age 62, but you know that claiming Social Security benefits at this age will reduce your monthly benefit by 30%. Instead of claiming early, you decide to use other retirement savings and purchase an immediate annuity or use income from an annuity you purchased years ago to cover your living expenses until you reach age 70. By doing this, you allow your Social Security benefits to grow by 8% each year beyond your FRA. When you start claiming at age 70, you receive 132% of your full benefit, significantly enhancing your financial security in the long term.

Financial Considerations

Before deciding to use annuities or other assets to delay claiming Social Security benefits, consider the following:

• Current Financial Needs: Assess your immediate financial needs and determine if you have sufficient savings or retirement accounts to cover expenses.
• Health Prospects: If you have health concerns or a shorter life expectancy, it might make sense to claim Social Security benefits earlier.
• Longevity Planning: For those with a longer life expectancy, delaying Social Security can provide substantial financial benefits over the long term.

Expert Advice

Consulting with a financial advisor can help you develop a personalized strategy that aligns with your financial goals and retirement plans. An advisor can help you evaluate the pros and cons of using annuities or other investment vehicles to bridge the income gap and maximize your Social Security benefits.

Misunderstanding Rules and Regulations

Social Security rules can be complex. Misunderstanding these rules can lead to missed opportunities and reduced benefits. It’s vital to stay informed about changes in Social Security regulations and how they affect your benefits.

Ensuring Compliance with Social Security Regulations

Failing to comply with Social Security regulations can result in penalties and reduced benefits. Ensure you understand and follow all the rules regarding earnings limits, tax implications, and reporting requirements.

Integrating Social Security with Other Secure Income Sources

A secure retirement plan integrates Social Security with other reliable income sources such as annuities, life insurance, and pensions. Here’s how you can balance these sources effectively:

Annuities and Social Security

Annuities can provide a steady stream of income in retirement, complementing your Social Security benefits. Fixed annuities offer guaranteed payments, providing financial security regardless of market conditions.

Life Insurance and Social Security

Life insurance can protect your family financially and provide an additional income source in retirement. Policies like whole life or universal life insurance can build cash value, which you can access if needed.

Balancing Pensions and Other Retirement Income

If you have a pension, it’s important to understand how it interacts with your Social Security benefits. Some pensions may reduce your Social Security benefits through the Windfall Elimination Provision (WEP) or the Government Pension Offset (GPO). Plan accordingly to avoid unexpected reductions.

Case Studies and Examples

Real-Life Scenarios
Consider John and Mary, a retired couple. John has a higher earning history, and Mary worked part-time. By delaying John’s benefits until age 70 and claiming spousal benefits for Mary at her FRA, they maximize their monthly income while ensuring long-term financial security.

Safe Approaches Taken by Successful Retirees

Many successful retirees focus on delaying benefits and integrating Social Security with other income sources. They avoid early claiming and ensure they understand the implications of their decisions on long-term financial stability.

Expert Tips and Advice

Insights from Financial Planners
Financial planners often recommend delaying Social Security benefits to increase monthly payments. They also suggest considering life expectancy, health status, and other retirement income sources when making this decision.

Ensuring Financial Security
To ensure financial security, diversify your income sources, stay informed about Social Security rules, and consider consulting a financial advisor. An advisor can help you create a comprehensive plan that maximizes your benefits and secures your retirement.

Conclusion
Maximizing your Social Security benefits is essential for a safe and secure retirement. By understanding how benefits are calculated, carefully timing your claims, and integrating Social Security with other income sources, you can ensure financial stability. Avoid common pitfalls, stay informed about regulations, and consider consulting a financial advisor to optimize your strategy.

Additional Resources
Social Security Administration – Official SSA website for comprehensive information and tools.
Retirement Calculators – SSA’s retirement estimator tool.

For personalized advice, consult with a financial expert. Check out our “Find a Financial Professional” section to get in touch. For a personal referral to an independent, licensed advisor, call us at 877-476-9723 or contact us here to schedule your first appointment.

Authored by Brent Meyer, founder and president of SafeMoney.com, with over 20 years of experience in retirement planning and annuities. Learn more about my extensive background and expertise here

The post Maximizing Social Security Benefits first appeared on SafeMoney.com.

Creating a tax-efficient withdrawal strategy for retirement involves a delicate balance between understanding the complex landscape of tax laws and effectively managing your retirement savings for both immediate income and future growth. As retirement draws closer, the focus naturally shifts from the accumulation of assets to the strategic distribution of these assets to fund your retirement years. This shift requires careful planning and consideration of the various tax implications associated with different types of retirement accounts.

The Shift in Focus: Preparing for Retirement

As you edge closer to retirement, the emphasis on accumulating wealth transitions to a strategy centered around the careful withdrawal of funds. This strategic withdrawal is crucial in maintaining financial stability and minimizing tax liabilities during your retirement years. The objective is to ensure that you can comfortably sustain your lifestyle without the worry of depleting your savings prematurely.

The Essence of Tax-Efficient Withdrawal Strategies

Tax-efficient withdrawal strategies are pivotal in optimizing the longevity and sustainability of your retirement income. These strategies are designed to minimize your tax burden while ensuring a steady flow of income throughout your retirement. Given the intricacy of tax laws, there’s no universal strategy that fits everyone. Instead, a personalized approach, considering the specific tax implications of withdrawals from different retirement accounts, proves most beneficial.

Understanding Retirement Accounts

• Traditional 401(k)s and IRAs: These accounts are funded with pre-tax dollars, which reduces your taxable income in the contribution year. The taxes on these funds are deferred until withdrawal, typically occurring in retirement when your tax rate may be lower.
• Roth 401(k)s and Roth IRAs: Contributions to these accounts are made with after-tax dollars. The advantage here is that withdrawals, including the earnings, are tax-free in retirement, assuming certain conditions are met. This feature can be incredibly beneficial for those expecting to be in a higher tax bracket in retirement.

Strategic Withdrawal Planning

A thoughtful withdrawal strategy often involves first utilizing funds from taxable accounts, followed by tapping into tax-deferred accounts, and, lastly, accessing tax-exempt accounts. This sequence is designed to maximize the growth potential of your investments by allowing the tax-advantaged accounts more time to compound.

Roth Conversions as a Strategic Maneuver

Roth conversions are a technique where funds from a traditional IRA or 401(k) are converted to a Roth IRA, thereby incurring taxes on the converted amount at the current rate. While this may increase your tax burden in the year of conversion, the long-term benefits can be substantial. The converted funds in the Roth IRA will grow tax-free, and withdrawals taken in retirement will not be subject to income tax. Furthermore, Roth IRAs are not subject to Required Minimum Distributions (RMDs), allowing for greater flexibility in managing your retirement assets.

The Advantage of Incorporating Annuities

Annuities can serve as a cornerstone in a tax-efficient retirement strategy, providing guaranteed income for life or a specified period. The tax deferral on investment gains within an annuity mirrors that of traditional retirement accounts, with taxes only being due upon withdrawal. This feature can offer a predictable income stream while potentially lowering your overall tax rate in retirement.

Implementing Your Tax-Efficient Withdrawal Strategy

Crafting and implementing a tax-efficient withdrawal strategy involves several key steps:

• Review Your Accounts: Start with a thorough assessment of your retirement accounts to understand the specific tax treatments and implications for each.
• Plan Your Withdrawals: Develop a withdrawal plan that aims to minimize your overall tax liability, taking into account both your current and anticipated future tax brackets.
• Evaluate Roth Conversions: Consider the benefits of converting traditional IRA or 401(k) funds to a Roth IRA, particularly in years when your income may be lower.
• Explore Annuities: Investigate how annuities might fit into your retirement planning, offering both tax advantages and a guaranteed income stream.

Conclusion: The Path to a Tax-Efficient Retirement

A well-thought-out tax-efficient withdrawal strategy is crucial for maximizing your retirement savings and ensuring a stable financial future. By comprehensively understanding the tax characteristics of your retirement accounts, strategically planning your withdrawals, considering the benefits of Roth conversions, and potentially incorporating annuities into your retirement planning, you can significantly enhance your retirement readiness and financial security.

It’s important to recognize that everyone’s financial situation is unique, and the most effective strategy for one person may not be suitable for another. Therefore, consulting with financial and tax professionals is essential to tailor a strategy that best aligns with your specific needs, goals, and circumstances. This personalized approach to retirement planning can offer peace of mind and contribute to a more secure and enjoyable retirement.

Looking for Guidance?

If you’re seeking personalized advice, consider reaching out to a financial professional.. Get started by visiting our “Find a Financial Professional” section, where you can connect with someone directly. If you would like a personal referral for a first appointment, please call us at 877.476.9723 of contact us here to schedule an appointment with an independent trusted and licensed financial professional.

Authored by Brent Meyer, founder and president of SafeMoney.com, with over 20 years of experience in retirement planning and annuities. Learn more about my extensive background and expertise here

The post Tax-Efficient Retirement Withdrawal Strategies first appeared on SafeMoney.com.

In an era where medical advancements and healthier lifestyles are pushing life expectancies ever higher, the challenge of ensuring that your wealth lasts as long as you do has become increasingly critical. For many, the solution lies in a financial instrument that is both ancient and misunderstood: the annuity.

Understanding the Longevity Risk

The joy of a longer life comes with the concern of outliving one’s savings. With retirement periods extending beyond the 20 or 30 years that past generations planned for, the risk of depleting one’s nest egg is real. Traditional retirement savings accounts, like 401(k)s and IRAs, are subject to market volatility and withdrawal rates that can make them unreliable as sole sources of retirement income.

The Role of Annuities

Annuities present a strategic solution to this longevity risk. By definition, an annuity is a contract with an insurance company that, in exchange for a lump sum payment or a series of payments, promises to pay you a regular income for either a fixed period or for your lifetime. This feature makes annuities a crucial tool in retirement planning, providing a steady income stream that can complement other retirement funds.

Types of Annuities and Their Benefits

Annuities come in various forms, each with its own set of features designed to meet different financial needs and objectives:

• Fixed Annuities offer a guaranteed interest rate and a predictable, steady payout, making them a safe choice for conservative investors.
• Variable Annuities allow for investment in the stock market, offering the potential for higher returns (and higher risk).
• Indexed Annuities provide returns based on a stock market index but with certain protections against market downturns.

Incorporating Annuities into Your Retirement Strategy

To effectively use annuities in mitigating longevity risk, it’s crucial to:

Assess your financial situation and retirement goals. Consider your current age, expected retirement age, health status, and financial needs.

Determine the right type of annuity. Evaluate which annuity type aligns best with your risk tolerance and financial objectives.

Consider the timing of annuity purchases. Deciding when to buy an annuity can impact the benefits you receive, with options ranging from immediate annuities that start paying out soon after purchase to deferred annuities that begin payments later in life.

Annuities and Estate Planning

Annuities can also play a role in estate planning. Certain types of annuities allow for the continuation of payments to a spouse or beneficiaries, ensuring that your loved ones are provided for in your absence.

Challenges and Considerations

While annuities offer significant benefits, they are not without their drawbacks. Fees, surrender charges, and the complexity of some annuity products can be deterrents. Additionally, the guaranteed income of an annuity comes at the cost of less access to your principal in case of unexpected financial needs.

Considering an annuity as part of your retirement plan? Speak with a trusted independent financial professional to explore how annuities can fit into your comprehensive financial strategy, ensuring a stable and secure future for yourself and your loved ones.

Navigating the Complex World of Annuities with a Financial Professional

When considering the integration of annuities into your retirement strategy, recognizing the importance of partnering with an independent financial professional cannot be overstated. Annuities can indeed form a crucial part of your retirement income, offering a buffer against longevity risk with their guaranteed income. However, the landscape of annuity products is diverse and complex, marked by variations in costs, fees, and terms across different offerings and providers. This variability underscores the critical need for expert guidance.

An independent financial professional brings to the table a wealth of knowledge and experience in assessing the wide range of options available, ensuring that the annuity selected aligns seamlessly with the broader contours of your retirement plan. This involves a holistic assessment of your financial landscape, including other income sources, liquidity needs, and long-term financial objectives. The intricacies of annuity contracts—ranging from fee structures to benefit options and riders—demand a nuanced understanding to navigate effectively.

Working with an independent financial professional also provides the opportunity for personalized advice tailored to your unique financial situation. They can help decipher the complex language of annuity contracts and interpret how different annuity features might play out in various market conditions or personal circumstances. Moreover, an independent financial professional can offer insights into how an annuity fits within the context of your overall retirement portfolio, balancing it against other investments to achieve a diversified and robust financial plan.

The decision to incorporate an annuity into your retirement income strategy is significant and requires careful consideration. The right independent financial professional not only aids in selecting the most suitable annuity product but also ensures that this decision is integrated thoughtfully within your comprehensive retirement planning. This partnership is invaluable for navigating the complexities of annuities, making informed decisions, and ultimately securing a stable and confident financial future in retirement.

Conclusion
As we face the prospect of longer lives, the importance of planning for financial longevity becomes ever more critical. Annuities, with their promise of lifetime income, offer a powerful tool to mitigate the risk of outliving your wealth. By carefully considering your financial situation, understanding the different types of annuities, and consulting with a financial advisor, you can develop a strategy that ensures your wealth lasts as long as your life.

If you are looking for someone to help you, many independent financial professionals are available here at SafeMoney.com. Get started by visiting our “Find a Financial Professional” section, where you can connect with someone directly. If you would like a personal referral for a first appointment, please call us at 877.476.9723.

The post Your Wealth: Financial Strategies for a Longer Life first appeared on SafeMoney.com.

Of course, retirement looks different for everyone, and you may have an idea of how long or short yours might be. Ultimately, it’s very difficult to estimate how many years your money will need to last. You certainly don’t want to run out of income in your golden years. Unfortunately, many people often underestimate how long they will spend in retirement, which can have big effects on their financial security.

Getting this “right” is one of the most difficult parts of retirement planning. That is why it’s better to err on the side of caution and plan for a long-time, post-career span of at least 30 years. Even so, how do you account for this in your income planning? What steps can you take to keep your financial security intact during this extended period?

In this article, we will look at how long retirement can last, what you can do to maintain your financial well-being, and other things to keep in mind.

How Many Years Can Retirement Last for?

A central aspect of retirement income planning is how long your retirement might last. You can’t know for sure how long you might live, so it’s hard to know how many years of spending that you should plan for. However, data from various sources indicates what longevity in retirement might look like.

According to a report by the TIAA Institute, there is a 30% chance that a 65-year-old man will live to at least age 90. For a woman who is 65, the likelihood goes up to 40%. These statistics show how crucial it is to have a long-term planning mindset for retirement.

Underestimating the duration of retirement can have far-reaching effects. The National Retirement Risk Index did some number crunching and found that 47% of working-age households are at risk of being unable to maintain their pre-retirement lifestyle once they retire.

Other studies build on that finding. According to the Employee Benefit Research Institute, four in 10 households are at risk of running out of money in retirement. It’s no wonder why Nobel Prize winner William Sharpe has called the risk of running out of income in retirement as the “nastiest, hardest problem in finance.”

What Can You Do to Plan for Many Years in Retirement?

Everyone wants a financially secure lifestyle in retirement. Of course, that means thinking ahead, creating a game plan, and taking steps so that you can retire and then stay retired.

Here are a few things that you can do for forward-thinking, long-term retirement planning.

Create Detailed Projections of Years of Retirement Living

Get started by putting together full-picture projections for your future spending and income needs. To help keep things organized, you might break down your expenses into two groups:

• Monthly living expenses – housing, transportation, grocery, utilities, insurance, etc.
• Non-essential spending – travel, leisure & entertainment, charitable giving, etc.

Remember, it’s ideal to aim for a 30-year timeline, or longer, in your spending projections. What might your spending in retirement look like if you are still working? Or if you are in early retirement, your expenses might look quite different in later years. How can you judge what those numbers could be?

Look at Your Current Financial Picture

An experienced, retirement-knowledgeable financial professional can help you sort this out, but your current spending patterns and income needs are great clue-ins for tomorrow. You form expectations of your lifestyle and how much you need to pay for it around your current household income.

Some of your present expenses will continue in retirement, such as groceries. Utilities and other monthly spending may change if you want to age in place in your present home, or if you wish to downsize or be around others in an active retirement living community. Wardrobe and transportation expenses may go down or disappear if you aren’t traveling for your career anymore. Take some time to think about these potential changes.

Now, what about non-essential spending? You may have some long-held goals that you won’t get to until retirement. Those goals may be personal and different from what your spouse or partner envisions for your retired lifestyle together.

It’s good to engage in open communication now so that you both have an aligned retirement vision and a plan for how to achieve what you wish to do. Start researching what your goals might cost and how you will get the money to pay for them.

Look at Inflation Over Many Years of Retirement

Don’t forget about inflation in your spending projections. Over time, inflation takes a toll on money’s purchasing power. In 1970, the median national price for a newly built home was $23,400. Fifty years later, in 2020, the price went up to $336,00 for a newly built home.

You don’t want inflation catching you unprepared. There are ways to account for a cost of living increase in your spending projections. Assume that your expenses, particularly your monthly living expenses, will go up by a certain amount each year. While inflation has been high in the early 2020s, historical average inflation has been around 2-3%. Adjust your spending projections by 2-3% annually over 30 years, and that will give you a good baseline for being ready.

Map Out Long-Term Income Streams

In retirement, it’s all about the income. Or in other words, income is the primary outcome. You need income sources that will pay you steady income and sustain your lifestyle during retirement. What does your financial picture look like for this?

Your spending projections will give an idea of how much income your investments will need to generate each year. Preferably, your plan will include reliable income sources that pay consistent, steady cash-flow over the long run. One way to look at this is distinguishing between “permanent” and “maybe” income sources.

‘Permanent’ income sources pay stable monthly income, such as Social Security, pensions, and annuities. Your income from permanent sources doesn’t change on a monthly basis.

‘Maybe’ income sources include stocks and mutual funds, which can go up and down in value with market swings. Your income from maybe sources can vary from month to month.

See how much overall income you might expect from your retirement holdings. The numbers from your permanent income sources are more crucial, because they are the monthly income streams you can count on.

Maximize Social Security for Bigger Lifetime Payments

Social Security is a major income staple for most retirees. When you claim them is important, but if you can, waiting to take your benefits can pay off in many ways. Delaying your Social Security benefits beyond full retirement age will greatly boost your monthly payout compared to if you had taken your benefits earlier.

Each year that you wait to take your benefits will let your benefit accrue another 8%. For example, say that your full retirement age is 66 and you wait until 70 (the maximum age to which you can delay). Your benefit will increase overall by 32%, which will greatly increase your monthly paycheck from Social Security.

Of course, this strategy for maximizing your Social Security benefits isn’t right for everyone. Talk to your financial professional, especially if your family or medical history might suggest that claiming early or before full retirement age might be worth it. Just like with waiting, those strategies have their downsides as well, such as reduced benefits payments.

Evaluate Your Pension Options

Take stock of other guaranteed income beyond Social Security. Do you have a pension? You have options for your pension, and guidelines such as the Rule of 85 can help you determine if you can retire with full pension benefits.

You can choose single or joint payouts for your pension. A single payout is a lifetime income stream paid to you. A joint payout is a lifetime income stream paid to you, and then to your spouse once you have passed away. It’s a survivor benefit in that way. There are risks to choosing a survivor benefit with your pension for your spouse, though.

Since you will have a surviving spouse benefit, the payments that you receive during your lifetime will be reduced. What’s more, if your spouse passes away before you do, you are saddled with reduced pension payouts, and the survivor benefit usually can’t be passed to someone else.

Talk to your financial professional about these risks, and what you can do to protect yourself against them.

Explore Annuities and Maximize Guaranteed Income

Annuities are like pensions, but they are even better in some respects. For one, you can customize your annuity to your goals, financial timeline, and other details that matter to you. It’s like a personalized pension plan in that sense.

Most people don’t have pensions these days. Go back to your spending projections. If there is a gap between your monthly living expenses and your permanent income sources, you have to fill the gap somehow.

Consider some of your retirement savings for an annuity. With how insurance companies pool the investment risk of all their annuity owners, and their insurer obligations to make annuity payments to their contract holders, you can actually get more for your money. If you run the numbers with an annuity against other financial instruments, the payout on an annuity tends to be higher than what other options would give you.

What’s more, the income from your annuity is contractually guaranteed. The insurance company must make good on its promise to pay you like clockwork each month. Your guaranteed income stream can last for the rest of your life, or it can be for a set period, like 20 years. Annuities are the only thing beyond Social Security that is available to everyone and that will pay you truly guaranteed income for your lifetime.

Annuities do have some downsides, such as some reduced liquidity compared to that available with various investments and financial instruments. Talk to your financial professional about whether an annuity is right for you.

Plan for Healthcare Expenses Especially in Later Retirement

We will always have expenses tied to our health needs. However, our healthcare spending is likely to go up in later retirement. Statistics show that health changes pick up in the mid-70s and evolve from there.

Healthcare spending is also increasing each year at a faster rate than other areas of spending. If you neglect them, healthcare expenses can drain your wealth faster, especially if your retirement money is in tax-deferred retirement accounts. Each time that you take distributions from those accounts to pay for healthcare, taxes are also due on your withdrawals.

You will want to have the right Medicare coverage and perhaps some insurance products that can multiples of benefits for each dollar of premium put into them. Various annuities and life insurance contracts pay enhanced benefits for eligible long-term care situations, for example. Some hybrid life products are very generous in the long-term care needs that they cover.

That brings up an important distinction: medical care is different from long-term care, and for the most part, Medicare doesn’t cover long-term care. Long-term care can be expensive in itself, so make sure that you explore some of options above, along with long-term care insurance as an option.

Going back to medical care, a Medicare supplement plan may have higher premiums than a Medicare Advantage plan or other Medicare options, but it will shoulder the vast majority of healthcare bills compared to those Medicare plans with reduced coverage.

Talk to your financial professional about your options for health coverage, what might make sense for you, and what insurance products might be available to help mitigate your health and long-term care costs. They can greatly save you money over the long haul.

The Bottom Line on Planning for Many Years in Retirement

Retirement planning is about more than just enjoying your golden years. It’s also about securing them without financial stress. By taking these steps and planning for many years in retirement, you can enjoy a worry-free future.

Preparing for a 30-year retirement timeline as a minimum, you can embark on this new chapter of your life with confidence and peace of mind.

Create projections for your spending needs and the income you will need to pay for your retirement lifestyle. Don’t forget about inflation in your income planning. When you see how much reliable income you have each month for your monthly living expenses, cover any income gaps with guaranteed income from Social Security, a pension (if you have one), and annuities. Consider if a strategy to maximize your Social Security payments by delaying when you take your benefits is right for you. Finally, come up with a game plan for medical care and long-term care spending.

Planning for all of these areas over a long-term timeline will make a difference in your quality of life in retirement. Finding the right financial professional to walk you through it all can also save you time, money, and effort. You might want to work with someone who is independent of any parent financial company, has experience in retirement planning, and knows the issues that you are likely to experience in your golden years.

Are you looking for a financial professional to guide you? You can get started by visiting our “Find a Financial Professional” section, where you can connect with a retirement-knowledgeable financial professional here at SafeMoney.com. Request a complimentary initial appointment to discuss your goals, concerns, and situation. If you want a personal referral, please call us at 877.476.9723.

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Dr. Pfau has made many powerful contributions in the field of retirement income planning. One is adding insights to the ‘safety-first’ school of retirement planning thought, or where a retirement plan is built on a safety-first approach.

How a Safety-First Approach Can Help with Financial Stress

In an interview with Wharton School of Business podcast knowledge@wharton, Dr. Pfau talked about how retirees can reduce the amount of financial stress that they feel after they stop working.

Here are some highlights from that interview. It’s good to keep these things in mind as we plan for our own financial futures.

Three Primary Retirement Concerns

Most retirees and pre-retirees have three main worries when it comes to finances.

Longer Living

The first worry is related to longevity. People are living longer than ever now, and this makes retirement more expensive.

Many retirees today can expect to live for another 30 years after they stop working. This makes saving for retirement more vital than ever.

Having Enough Retirement Money

The second worry is spending your money during retirement. You need to create a stable spending plan for your post-career years so that you don’t run out of money.

Your spending plan should also be able to handle unexpected financial expenses. Those may include major illness or long-term care.

Market Ups and Downs

The third worry is market volatility. Your retirement portfolio is also particularly vulnerable to market losses in the red zone: ten years before you retire and the ten years after you retire.

Sequence of returns counts for the most at this juncture. It’s good to watch how your investments are performing (but within reason, especially if you are prone to knee-jerk reactions in down-market situations).

A major market loss during this period can seriously affect your ability to retire when you want. It may force you to work longer than you had planned.

Your financial professional can help you balance this risk with the practical benefits of also staying invested. Ask them for insights if you have any questions about this.

Two Schools of Retirement Thought

There are two basic approaches to retirement planning. One of them is the “probability-based” scenario, and the other is the “safety-first” scenario.

According to Pfau, the probability-based approach is “more comfortable with investments and with the idea of holding stocks for the long run. This is the view that if you can hold on to your stocks for a sufficiently long time, they will generally outperform bonds. They should support more spending than just a bond portfolio could in retirement.”

He continued: “The idea in the probability-based world is to use an aggressive investment portfolio. The baseline advice is hold 50% to 75% stocks in retirement. You fund your retirement from your portfolio earnings and also from the principal in your portfolio.”

In contrast, the safety-first approach combines investments with risk-pooling and insurance.

Some money is put into something like an annuity to support spending in retirement. The rest of the assets are allocated into investments.

In exchange for giving up some potential for market returns, the annuity provides a reliable, guaranteed income stream for baseline retirement spending. The remaining money goes into stocks and bonds for a combination of growth and income.

Following an Integrated Approach

Having said, Pfau recognized that there is a happy medium called the “integrated approach.” With this strategy, part of the assets goes into an annuity and the remaining assets into aggressive investments.

The guaranteed income from the annuity helps maintain your standard of living. Meanwhile, the other investments can be put into higher-risk instruments that pay higher returns over time.

The income from your annuity, in addition to Social Security, help offset this investment risk.

How Much Do You Need to Follow This Approach?

Pfau said that retirees need at least $100,000 in their retirement portfolios to be able to use the integrated approach. He cautions investors not to put all of their money into an annuity because they do need some liquid assets.

This strategy can also work for affluent retirees who want a consistent, predictable lifestyle. Of course, they can put a smaller portion of their assets into an annuity.

They might put money into an annuity to cover their base expenses during retirement and invest the rest of their money in a diversified portfolio. That can enable them to leave a legacy for their heirs.

The Waiting Game Works Well for Social Security

It’s also wise to delay taking Social Security until age 70, if at all possible. This approach wasn’t always the optimal solution.

In 1983 when the Social Security laws were last updated, interest rates were much higher. People also weren’t living as long as they are today. But the 25% benefit boost for waiting until age 70 is hard to pass for many retiree situations.

If you live to age 90, then waiting for that additional four to eight years will really pay off. This is especially true for the higher earner of a couple, as the bonus 25% will be larger.

Should the higher income earner pass away first, then the surviving spouse will get a larger residual benefit. It’s more likely that at least one spouse will get more benefits than they would have if the higher earner had claimed Social Security at their full retirement age.

What Should We Be Thinking About with Retirement Planning?

The first question that retirees should ask themselves is how long they think that they are going to live.

If your parents died in their 60s, don’t assume that you will go that soon. Improved healthcare has many people living longer than ever before.

Therefore, it’s not prudent to plan your retirement based on the assumption that you will die at age 65.

The next question is taxes. You should have a blend of taxable, tax-deferred, and tax-free accounts. It lets you have some control over how much of your income is taxed.

One suggestion from Pfau is to take periodic withdrawals from taxable or tax-deferred accounts so that you can plan ahead for those taxes when you file.

In turn, that lets your Roth accounts grow until you need to take a large distribution. You also don’t impact your tax planning for that year.

One more important question is how much money to put in an annuity. There is one way to determine this.

Calculate how much money you will need in the annuity for it to pay the guaranteed income that you will need for your retirement lifestyle.

Once you have that in place, then remaining assets can be invested aggressively, as Pfau discussed. This can stretch your savings further over time and give you more money to live on.

The Four Ls of Retirement Planning

Ultimately, Pfau believes that retirement planning boils down to four key factors:

• lifestyle,
• longevity,
• liquidity, and
• legacy.

Those are the financial goals of retirement. The lifestyle and longevity are your retirement budget. Legacy is your legacy goal. Pfau’s most important advice would be to think about liquidity.

Don’t Leave Liquidity on the Back-Burner

Liquidity is the concept of when you have money to cover unexpected expenses.

In a retirement income plan, for something to be a liquid asset it can’t be earmarked for something else. You can’t double-count assets.

There is an idea that just because you have a brokerage account with stocks and bonds, that it’s technically liquid. But it may not be truly liquid because that money has been earmarked for another purpose.

If you spend it because you have an unexpected spending shock, that will reduce your ability to meet your future baseline spending.

You have to be more holistic when thinking about liquidity. Your assets are only liquid if they haven’t been earmarked for something else in the financial plan.

Putting Your Financial Plan in Place

Pfau offers many practical insights for retirees in every situation. You can use these principles and research-backed rules to help build a retirement plan in which you can be confident.

Nevertheless, no two situations are ever the same. What you will need for your retirement plan, and the assets that you use to achieve it, will look very different from those of others.

If you are looking to settle your retirement ‘what-ifs’ and want personalized guidance for your circumstances, consider seeking out an independent financial professional.

When they are independent, the financial professional is better equipped to serve you. They aren’t beholden to one financial company, and they are free to offer you solutions from many providers that can be customized to your needs.

You should also look for someone who specializes in retirement strategies and understands the unique challenges, issues, and nuances of this life stage. They will have knowledge and experience in helping other clients enjoy successful retirements in many different market cycles, economic conditions, and other settings.

For your convenience, many experienced and independent financial professionals are available here at SafeMoney.com.

Get started by visiting our “Find a Financial Professional” section, where you can connect with someone directly for an initial appointment. You can discuss your situation and explore a working relationship. Should you need a personal referral, please call us at 877.476.9723.

The post How to Retire with Safety and Security first appeared on SafeMoney.com.

Sequence of returns risk can affect your long-term income the most in your early-retirement years. That is the timespan just before and right after you retire. You may have heard of that period called the “retirement red zone,” or generally the 10-year spread prior to and after retirement.

It’s true that average returns (including dividends) for the S&P 500 from 1928 to 2021 have exceeded 10%. But averages can be deceiving for long-term income planning. What matters just as much is the order of returns, or the actual timing of when a portfolio grows or loses value. As we will see, losses in those early years could make or break your income goals, setting up the risk of running out of retirement money.

This potential hazard is called sequence of returns risk, or just sequence risk. To illustrate it, we will talk about it in two formats: by analogy and then through two hypothetical portfolio scenarios.

What is Sequence Risk?

Imagine that you have two gardens. You plant identical vegetable seeds in each so that you can grow your own food.

Early in the growing stage, Garden 1 experiences blight. Not all the vegetables make it. You still have a small crop, but each time you pull a vegetable to eat, you are leaving less and less behind to continue growing.

By contrast, Garden 2 progresses and gives you a great first crop and seeds for your next planting. You keep planting, canning, and stockpiling the harvests along the way. Then Garden 2 experiences blight. But you can continue to eat well because the blight hit after Garden 2 had produced crops. You will be able to eat while the garden recovers from blight and can potentially grow vegetables again.

This, in a nutshell, is an example of sequence of returns risk. It’s a scenario in which having portfolio losses early in the game, when you might start drawing on that portfolio for income, could mean you have to play catch-up for the rest of your retirement.

Sequence Risk in Action

Now, let’s take a look at two hypothetical portfolio scenarios. In the first, both portfolios will be tracked over a 21-year period. The order of annual returns for the second portfolio will be reversed so we have negative returns showing up in the early years of our 21-year performance period.

Here’s an overview of our assumptions.

Hypothetical Retirement Portfolios: Scenario 1

• Names of Portfolios: Portfolio A-1 and Portfolio B-2
• Starting Portfolio Values: $400,000
• Number of Years: 21, including one extra for 20 years of performance
• Portfolio A-1 Performance Range: S&P 500 index calendar-year total returns, 1996-2016, includes reinvested dividends
• Portfolio B-2 Performance Range: Reversed order of same S&P 500 index calendar-year total returns
• Source: Aswath Damodaran, New York University Stern School of Business, data from FRED database of Federal Reserve Bank of St. Louis

Even with the order of returns reversed, both portfolios ended up with the same final value of $691, 303. Now, what happens when annual withdrawals are introduced?

Hypothetical Retirement Portfolios: Scenario 2

• Names of Portfolios: Portfolio A-1 and Portfolio B-2
• Starting Portfolio Values: $400,000
• Number of Years: 21, including one extra for 20 years of performance
• Portfolio A-1 Performance Range: S&P 500 index calendar-year total returns, 1996-2016, includes reinvested dividends
• Portfolio B-2 Performance Range: Reversed order of same S&P 500 index calendar-year total returns
• Portfolio Withdrawals: Annual withdrawals starting at $16,000 with withdrawal rate of 4%
• Inflation: Increasing withdrawal amounts by 2% annually to account for inflation
• Source: Aswath Damodaran, New York University Stern School of Business, data from FRED database of Federal Reserve Bank of St. Louis

Here, the second portfolio ran out of money in Year 17, with its account balance shooting below zero.

How Can Sequence of Returns Risk Affect Your Retirement?

For the unlucky who retired in 2008, during which the S&P 500 fell 37%, their retirement savings were significantly depleted.

While the market would recover, they had fallen so deeply into a hole that it would be difficult to reach the retirement account balances they were on track to achieve. And what if they had already started drawing on income from those accounts? Then the path to recovery would have been even harder.

With that seismic event in the rear-view mirror, some pundits have advocated for retirement income strategies that project lower “failure rates.” But respected author Wade Pfau, Ph.D., CFA®, a foremost authority on the subject, has an alternative take.

He writes, “The idea that retirees should focus on finding a spending strategy that maintains a rather low failure rate, as is par for the course with safe withdrawal rate studies, is not adequate.”

Why? Because, in everyday life, people don’t fail at 23% or 55%. They either succeed or fail. It’s a binary split of potential outcomes. In fact, when communicating in laymen’s terms, many people would say they succeed or fail “100%.”

Why Do These Strategies Fall Short?

The same is true when you either have enough retirement income to sustain you or you deplete it in your early years as a result of a threat like sequence-of-returns risk.

Writing for RetirementResearcher.com, Pfau explains that the narrow focus on a lower failure rate may fall short:

“[It] ignores the lost potential enjoyment from spending more even if it means having to cut back later, it ignores how much flexibility retirees may have to cut their spending at a later date, it ignores the other availability of spending resources outside of the financial portfolio, it ignores the probability of still being alive in late retirement, it ignores any goals to leave a bequest, and it ignores potentially how long the ‘failure’ condition may last.”

Pfau’s answer? “Retirees need to be thinking about a more complete model that incorporates these considerations when developing their retirement income strategies.”

What’s in Your Portfolio?

While studies and past generational data give some barometers for portfolio and spending strategies, you as an individual investor are so unique that those guidelines are likely to be statistically insignificant for you.

That means that the responsibility is yours to examine your individual circumstances and determine what will help you (and your partner) achieve your specific goals in retirement. You may consider working alongside a financial professional who understands these goals.

Are you a perpetual market chaser, even in retirement? As inflation continues to rise, compounding growth of assets is important, since you no longer have the sources of income you had while you worked to fuel your household spending needs.

But perhaps just as more important is holding on to what you have.  Evaluate your current retirement income plan and ask the tough question: Would my retirement income plan survive the pressure of sequence of returns risk? Consider incorporating financial vehicles that may help reduce the risk during your retirement.

Risk-Averting Action Items

Knowing that the retirement-savings rug could be pulled out from under you, be sure to consider the dynamics of the market. No one also knows what markets will do in the future.

Short of having a crystal ball, discuss with your financial professional what this could mean for you. Discuss your asset allocation and consider pursuing a lower level of market risk.

If an objective analysis of your financial picture shows it makes sense for you — think about diverting part of your retirement nest egg toward strategies that provide guaranteed income, no matter how the market performs.

Consider all the ways you can preserve the savings and assets you have built over the years. And make sure your plan equips you to maximize spendable income after fees, inflation, and taxes. 

Plan to Manage Risk and Retire Comfortably

You need to have enough left over to enjoy your life and grow your financial garden. When you are ready for professional guidance with tending and maintaining the progress of your income plan, financial professionals at SafeMoney.com can help you.

Use our “Find a Financial Professional” section to connect with someone directly. Should you need a personal referral, call us at 877.476.9723.

The post Sequence of Returns Risk in Retirement first appeared on SafeMoney.com.

These designations are programs in which an advisor has completed certain studies and exams in order to have professional recognition of their expertise in a certain field. For example, some designations for financial advisors cover retirement income planning.

Other designations deal with high-level knowledge and planning concepts around life insurance products. Then some designation programs recognize an advisor for high-level knowledge of overall concepts, such as around investments, retirement, taxes, financial planning, insurance, risk management, and estate planning.

How Can Professional Designations Help with Hiring an Advisor?

If you are looking for a financial professional to help with your situation, then these professional designations can be a nice clue-in of what expertise that someone brings to the table. These letters denote professional credibility and also a code of ethics in most cases.  

On the other hand, many highly experienced and competent financial professionals don’t necessarily carry this sort of recognition. How do you distinguish them, then? Check out what to keep in mind when hiring an advisor, if you are seeking out the right guide for your financial needs.

All of this said, there are many professional financial designations. Sometimes it’s hard to discern which credentials really mean something and which ones don’t.

Let’s go over some of the professional designations for financial advisors that deal with retirement and life insurance products, since those are tied to contractually guaranteed strategies covered on this site. Here’s a breakdown of the major financial designations and the requirements for them.

Chartered Life Underwriter® (CLU®) Designation

This designation is the oldest professional credential in the financial industry. It was first introduced in 1927.

Over 106,000 insurance professionals have earned this credential since then. It resembles the Certified Financial Planner® credential (more on that in a second) in that it requires the completion of several classes. This includes several courses that the CFP® credential requires.

A total of eight courses related to various aspects of financial planning must be completed. The CLU® designation is offered exclusively by the American College of Financial Services. This credential also comes with a code of ethics and has periodic continuing educational requirements.

Required CLU® certification courses cover the following:

• Fundamentals of insurance planning
• Individual life insurance
• Life insurance law
• Fundamentals of estate planning
• Planning for business owners and professionals

Elective courses cover financial planning, income taxation, retirement needs planning, investments, disability & lifetime planning, and planning for special needs families.

Certified Financial Planner® (CFP®) Designation

This is perhaps the most widely known financial professional designation today. This designation was first created in 1974.

In order to carry this designation, applicants must have a bachelor’s degree plus at least three years of experience in the financial industry. Then they must complete coursework that covers insurance, investments, retirement, estate, and tax planning as well as ethics and the financial planning process.

A rigorous 6-hour board exam tests them on all of the topics with at least two case studies. Finally, they must adhere to a strict code of ethics that holds them to the position of fiduciary.

CFP® holders must complete 30 hours of relevant, continuing educational coursework every two years to remain in ‘good standing.’ They also pay an annual fee to maintain their credential.

Chartered Financial Consultant® (ChFC®) Designation

This credential is also offered exclusively through the American College of Financial Services. Over 40,000 financial professionals now carry this designation.

It was originally created to be a complement to the CFP® credential but for the insurance industry. Although it also requires the completion of eight courses, it doesn’t have a comprehensive board exam. It also comes with a code of ethics and has periodic continuing education requirements.

In the eight courses of the ChFC® designation program, the financial professional will study:

• The financial planning process
• Risk management strategies, including risks tied to insurance, human capital, wealth management, liability, and property
• Income tax strategies
• Retirement planning strategies
• Investment strategies
• Estate and gift-tax planning strategies
• Personal financial planning strategies
• Specialized strategies, including for divorced, blended, and other family households

Life Underwriter Training Council Fellow® (LUTCF®) Designation

Over 70,000 insurance professionals have earned this credential since 1984. This credential is offered by the National Association of Insurance and Financial Advisors (NAIFA).

Over 62,000 insurance professionals now carry this designation. Newcomers to the insurance space often pursue it because it offers marketplace training in addition to academic knowledge.

The LUTCF® designation also comes with coursework requirements. The coursework covers the following:

• Financial planning & risk management
• Getting started in the life insurance industry
• Life insurance products
• Insurance & investment products
• Strong focus on life insurance, annuities, mutual funds, disability income
• Other focuses are on long-term care, health & group insurance, and property & casualty insurance
• Risk management tied to retirement planning, estate planning, and special family situations
• Presenting basic plans to individuals and business owners

Retirement Income Certified Professional® (RICP®) Designation

Unlike investments and other parts of the financial space, retirement income planning is just now emerging as a field with more breakthrough research and insights. Record numbers of retirees are moving from the workforce. This is one driving factor behind why income planning is becoming more of a well-researched “science.”

There is a growing need for financial professionals who understand how to help them maximize their income, manage risk, and make their money last for their lifetime. The RICP® designation was created as an answer to this demand. The American College of Financial Services also offers this designation, and it’s one of the newest programs for financial advisors.

Financial professionals wanting to specialize in retirement income planning are a natural candidate for this designation. They must have a minimum of three years of financial industry experience in order to pursue recognition as an RICP® designee.

Like with other designations, coursework must be completed for the RICP® designation as well. Afterward, financial professionals must pass an examination covering topics relating to their studies. The topics covered in the coursework include retirement income strategies, portfolio assessment, personal finance, healthcare expense planning, home equity strategies, estate planning strategies, and more.

Upon completion, those with the RICP® designation are held to a code of ethics and must fulfill 15 hours of continuing education every two years.

What Else to Keep in Mind

There are many other legitimate financial designations, but these are probably the most common. These designations matter because they cover a great deal of material that normally isn’t found on the insurance and securities licensing tests.

Those tests mostly cover industry rules and the technical nuts and bolts of different parts of the financial industry. These credentials cover the meat of how to effectively do financial planning for clients.

Again, there are also very competent, experienced advisors who don’t carry any designations after their names. It’s prudent not to be too quick to dismiss someone only on the basis of their designations or lack thereof.

Finding the Right Fit for Your Financial Goals

Consult your financial advisor for more information on these designations and how they can impact you. What if you are looking for a financial professional to help you in your situation?

Whether you need someone to guide you with your retirement strategy, want another opinion of your current plan, or need something else, many independent financial professionals are available at SafeMoney.com to assist you.

Use our “Find a Financial Professional” section to connect with someone directly. You can request an initial appointment to discuss your needs and explore a potential working relationship. Should you need a personal referral, please call us at 877.476.9723.

The post A Guide to Professional Designations for Financial Advisors first appeared on SafeMoney.com.

This type of risk can be more dangerous than pure market risk because of the effects that it can have on your long-term retirement outlook. This can have a nasty impact especially if your money takes a hit in your early retirement years.

Sequencing risk looks at the order in which your portfolio returns occur. If you take losses early in your retirement, then it will impact your finances for the rest of your life. And you might well spend the rest of your retirement playing “catch-up” from those losses, especially if you were already drawing income from your portfolio and compounding the effects of those losses even further.

Sequencing risk can have strong effects on people’s financial wellness that can span years. So, it’s critical to have a strategy in place for this possibility, especially if you are in the retirement red zone (within 10 years before or after retirement).

Why Is Sequencing Risk a Greater Threat?

Dr. Wade Pfau is one of the leading researchers in retirement planning, income strategies, and sequencing risk. He noted the greater weight of sequencing risk versus investment risk in an article he wrote in an article appearing in Advisor Perspectives:

“Retirees face market risk, which concerns how market volatility causes average investment returns to vary over time. Sequence of returns risk adds to the uncertainty related to overall investment returns. The financial market returns experienced near one’s retirement date matter a great deal more than most people realize.”

“Even with the same average returns over a long period of time, retiring at the start of a bear market is very dangerous; wealth can be depleted quite rapidly as withdrawals are made from a diminishing portfolio and little may be left to benefit from a subsequent market recovery.”

He continued:

“Sequence of returns risk relates to the heightened vulnerability individuals face regarding the realized investment portfolio returns in the years around their retirement date. Though this risk is related to general investment risk and market volatility, it differs from general investment risk.”

“The average market return over a 30-year period could be quite generous. But if negative returns are experienced when someone has just started to spend from their portfolio, it creates a subsequent hurdle that cannot be overcome even if the market offers higher returns later in retirement.”

How Could Sequencing Risk Affect Your Retirement?

Even if your portfolio has large gains in later retirement years, the effects of early losses and a drawdown on a portfolio for retirement income can still linger.

Worse, they can stick to the point of the retiree having to downsize their lifestyle, go back to work, or be permanently stuck in employment. What’s more, that is assuming their health stays up to snuff.

Keeping the Effects of Sequencing Risk at Bay

How can the dangers of sequencing risk be countered? By combining modern strategies outlined by Dr. Wade Pfau: harnessing the powers of U.S. equity markets and the predictability as well as safety of income streams from annuities in a comprehensive retirement strategy.

Even if the market has a big swing down, fixed annuities will keep your money intact and keep paying you monthly income like clockwork. Insurance companies structure the risk they carry in unique ways so you, the annuity owner, have a higher degree of income certainty in your retirement.

How Does This Work?

Dr. Wade Pfau explains this by noting the differences between a defined-benefit pension plan and a defined-contribution plan like a 401(k) account. Whereas the 401(k) plan will produce an income stream that can change depending on how its assets perform in the market, pensions work quite differently.

The pension manager pools two types of risk that individual retirement savers can’t manage as well on their own. The first is longevity risk, where people are living longer thanks to advancements in medicine and technology.

Since pension plans pool risk across a wide stratum of investors, the pension manager can make certain assumptions about each person’s life expectancy. The manager can then structure monthly pension payments to each person based on these mortality assumptions. Those who die early will help subsidize the monthly payments to those who live longer.

Because of the strongly-pooled risk management, the second risk that a pension plan helps guard against is sequencing risk. While it would be hard for individual investors to recover against ill-gotten losses early in retirement, it’s much easier to absorb the effects of such risk when it’s pooled across many people.

Some investors will have good investing sequences that allow for more spending and more income certainty. Others won’t have as good of fortunes with the returns sequencing they earn.

But by sharing this market risk across many investors, the pension manager is able to “give the same average benefit for the same contributions” to everyone, as Dr. Pfau writes.

Why Annuities Are a Must in Managing Risk

Annuity companies handle this risk in the same way. And the way they invest the money they take in from fixed annuity premiums is also very conservative.

The bulk of the premiums (think more than 90 cents of every dollar) are put into low-risk, low-volatility assets like Treasury securities and investment-grade corporate bonds.

Hence, when they are held to maturity, these types of assets have more predictable and stable patterns of return than other equity-based assets. In contrast, those equity-based assets have fast-changing values that are determined by stock buyers and sellers.

Fixed indexed annuities also provide several other benefits, such as guaranteed lifetime income, tax-deferral, and exemption from probate. It should be noted that other types of annuities come with these benefits as well.

However, unlike other kinds of annuities, fixed indexed annuities lock in the interest that they earn during a given crediting period so that those interest earnings can’t be lost again.

Fixed indexed annuities are ultimately designed to provide higher growth than traditional fixed annuities.

Build Your Own Strategy Against Sequencing Risk

By incorporating a fixed annuity or indexed annuity into your portfolio, you can help establish a guard against sequencing risk and bring more peace of mind about your retirement strategy.

Ask your advisor about how they can help you find an annuity that makes sense for you and your plan. An independent advisor or agent can comb through multiple options and assist you in locating a solution that really fits your goals and situation well.

What if you need a financial professional to help you walk through your overall retirement “what-ifs” and find answers for your personal situation? No sweat. Many experienced and independent financial professionals are available at SafeMoney.com to assist you.

Use our “Find a Financial Professional” section to connect with someone directly. You can request an initial appointment to discuss your situation and explore a working relationship. Should you need a personal referral, feel free to call us at 877.476.9723.

The post Sequencing Risk and Its Challenges for Retirement Planning first appeared on SafeMoney.com.

According to a survey by the Employee Benefit Research Institute, just 42% of Americans have attempted to calculate how much money they might need for retirement. In other words, almost 60% haven’t estimated how income they might require.

A Gap Between Retirement Confidence and Readiness?

In the survey, just 3 in 10 people said they have tried to estimate how much they might pay in healthcare expenses during retirement. These are sobering findings, considering that many people report they are confident in knowing how much money they need to live comfortably in retirement.

Six in 10 (67%) said they were “somewhat confident” about their understanding of their income needs. As for higher levels of assurance, two in 10 (23%) said they were “very confident.”

However, as the Employee Benefit Research Institute’s other findings show, the vast majority of retirement savers haven’t actually calculated how much money they might actually need. This could set retirement savers up for a future of unnecessary stress – and even reduced lifestyles.

Will You Have the Income You Need?

In another part of the survey, retirees were asked whether they were confident that “they will have enough money to last their entire life or will be able to afford the lifestyle they are accustomed to.”

More than 3 in 4 retirees reported they were “somewhat confident” or “very confident.” Eight in 10 were confident about being able to cover health expenses, and 6 in 10 were confident about being able to cover long-term care expenses.

How Much Could Health Costs Run?

Fidelity estimates that a typical 65-year-old couple retiring in 2020 would be expected to pay $295,000 in total healthcare and medical expenses throughout their retirement. And according to Genworth, an insurer serving the long-term care market, long-term care expenses can also carry a hefty price tag.

Nationally, the average cost per month for a semi-private room in a nursing home facility was $7,513 in 2019. Meanwhile, the average cost per month nationally for a home health aide was $4,385.

Sidestepping Costly Retirement Planning Mistakes

With guidance from a financial professional, you can build a plan for how much income you will need — and how you will pay for costly health needs like medical services and long-term care.

Here are questions you can think through as steering points for your planning and when you work with your financial advisor on your income plan. They can help you ensure that you have sufficient lifetime income for your long-held goals and lifestyle plans.

Review Your Current Financial Progress

Take a look at your portfolio now. How much have you accumulated in assets and savings? How much longer will you work? At what age are you planning to retire?

How much more will you save? While it may not be ideal, working longer to delay retirement can have a few upswings.

Not only will you have more time to earn more income and therefore sock away more in much-needed savings. This also puts off the timeline of starting to take retirement withdrawals from your portfolio so you can replace the earned income you took home during your career.

In turn, that gives your money more time to grow to a larger nest egg.

See How Much Income You Might Need

If you are still unsure of your savings progress, you can determine this by “working backwards.” This involves getting a hold of what your monthly retirement income needs will be.

Your current monthly cash-flow and spending will be valuable clue-ins of what your future lifestyle may look like and what it may cost. Use your current income and household expenditures as guides for what your expected future lifestyle will be.

Of course, certain parts of your financial picture will change. Some costs will go away. For example, spending tied to raising children will go down as your kids move out of the house and start building lives of their own.

Then some expenses will go up. An almost-absolute financial certainty for this is healthcare costs, which tend to increase as health changes with aging.

Your financial professional can help you nail down what expenses you should be planning for. For effective planning, it’s prudent to use at least a 30-year timeline in your retirement income projections.

If you can run projections using multiple scenarios, you will be even more prepared. Your advisor can help you with these tasks.

Determine How Much Income You Will ‘Earn’ in Retirement

Next, figure out how much you will earn. Yes, this is quite a bit different from the take-home pay you received during your career. But the IRS and quite a few state tax-collecting authorities treat distributions from retirement accounts as earned income, meaning your withdrawals will trigger some tax bill.

Social Security benefits are likely to play some role in your retirement income plan. How much you receive in monthly payouts will depend on when you take your benefits. While claiming at your full retirement age will entitle you to your full monthly benefit, waiting until age 70 can boost your overall benefit by roughly another 32%.

What if you find that you have savings shortfalls to cover and you intend to pursue some form of work as a source of income? Then you will want to calculate the tax effects, if any, on your benefit payouts and how your earned income will affect your tax bill in general.

Lock Down Your Income Sources

Determine where will the money come from. Your current source of income, whether it’s from career employment, entrepreneurship, or perhaps even a mix of both, isn’t likely to continue as your primary source in retirement.

Once you call it quits and leave the workforce, the assets and savings you accumulated over many years will power your income streams. These sources of income come with different tax implications.

Your pre-tax dollars, or so called “qualified” money inside a traditional IRA as well as 401(k), will be taxed at ordinary income rates when they are withdrawn.

Liquidating shares in an investment portfolio that you funded with after-tax dollars, or “non-qualified” money, will trigger a capital gains tax bill.

Your advisor can help you with planning how you will receive income from these sources and how to make your withdrawals as tax-efficient as possible. Ask your advisor whether you need to be contributing to a Roth IRA instead of a traditional IRA in order to accumulate some tax-free income.

If you have some money built up in your employer retirement plan or a traditional IRA, you may ask your financial professional about Roth account conversions. That needs to make sense numbers-wise for your situation, but a Roth conversion can potentially lower the lifetime taxes you pay in retirement.

The bottom-line of all of this? It’s essential to get a sense of how much money you will need for a comfortable retirement.

Putting a Plan Together

So, start building a plan to catch up on savings if you have to. A rock-solid plan will put you in the driver’s seat to deploy your money wisely and let you make the most of it for a comfortable retirement.

You might not feel comfortable crunching all of these numbers yourself (especially because they involve several time-value-of-money calculations). That is more than okay.

No sweat, an experienced financial professional can help you walk through all of this. Their knowledge and experience from helping others like you create personal financial strategies and navigate the “what ifs” of retirement can make a big difference for your peace of mind.

Depending on their focus, your financial professional may also give you an update on your progress using sophisticated planning software. This can give you a fairly clear picture of how you will fare in retirement given your current circumstances.

Avoid Retirement Planning Mistakes by Planning Today

No matter what, a conversation with your advisor will make clear what changes you need to make in order to get to where you need to be. Whether you should increase your contributions to retirement accounts or cut back spending in certain areas, they can help you determine precise steps for reaching your goals with confidence — now and in the years ahead.

Consult with your financial advisor today for more information on how you can ensure that you will have a comfortable retirement. What if you are looking for a financial professional to guide you?

No sweat. Many experienced, independent financial professionals are available at SafeMoney.com to serve you in your unique situation. Use our “Find a Financial Professional” section to connect with someone directly. Should you need a personal referral, call us at 877.476.9723.

The post Don’t Make This Common Retirement Planning Mistake first appeared on SafeMoney.com.

Retirement Planning Companies May Have Different Specialties

However, investors have many options of financial firms in today’s industry. Different firms can vary in the unique expertise to the table. Some companies specialize in investment management and others in financial planning, for example.

While similar in some ways to financial planning and investment management, retirement planning is different. It concerns advice on the distribution of money and how people will use the money for income needs.  

Business Type Also Matters

There is also the question of business organization. Some firms are just one of many broker offices for huge financial companies, while other firms are small, local businesses. Whether they have a captive or an independent status may influence the kinds and selections of the retirement products they can offer you.

So, all of this adds up to many retirement planning options for investors. How do you choose the right partner for you? Let’s take a look at some questions to answer.

Questions to Ask about Retirement Planning Companies

1. Do I need help from a retirement planning company? First things first. Do you really need to hire a retirement planning company? This depends on many factors, including your personal goals and needs, the amount of wealth you are looking to carry towards retirement, and how financially savvy you are on your own. The reality is, however, that pretty much anyone can benefit from at least exploring the options available. Many retirement planning firms offer a first meeting at no cost and no obligation.

You may see benefits from a first meeting in a number of ways:

• Receiving a new, fresh perspective on your financial picture you didn’t have before
• Experiencing first-hand the advantages of working with financial professionals specializing in retirement
• Seeing what’s important to have in place as you plan for your retirement future
• Bettering your understanding of how to interview financial firms and judge their expertises
• Discovering retirement and income strategies you hadn’t considered before
• Learning of retirement and income strategies you never knew beforehand

Whether you work with a retirement planning company is ultimately a personal choice. But many investors have benefited from the guidance of financial professionals.

In a study by Northwestern Mutual, individuals with advisors were nearly 200% more likely (68%) than those without advisors (36%) to say they feel “very financially secure.” Compared to those with financial advisors, investors with no advisor were twice more likely (53% versus 27%) to believe a lack of savings was an obstacle to retirement financial security.

Many financial planning companies and advisors work with people independent of their income and wealth level. Others will only take on clients with at least $100,000 in accumulated wealth or more.

Of course, everyone has some level of financial goals and starting to think about retirement is never too early. You may want to explore your options.

2. Is the company qualified to help me? As you consider financial professionals at different retirement planning companies, keep this in mind. Retirement planning can require specialized knowledge in many areas:

• Claiming Social Security benefits at the best time for you and/or your partner
• Determining how much income you may receive in retirement
• Creating withdrawal and/or distribution strategies with tax-efficient results
• Maximizing income for your preferred lifestyle goals
• How much guaranteed income you might need besides from Social Security
• What kinds of taxable income your portfolio may provide
• The timing of dealing with debt pre-retirement or post-retirement
• Potential company plan rollovers and where you should keep your money
• Managing unique risks in retirement, like inflation, market corrections, and so on

An effective retirement-focused professional will be more of a listener than a talker. They will take time to understand your complete financial picture: your planning horizon, your current investments and financial resources, your goals and needs, your risk tolerance, your liquidity requirements, and other important personal variables.

You shouldn’t receive recommendations for your situation until they fully understand all of these dimensions.

You will also want to consider a financial professional’s areas of expertise, credentials, background, and professional record.

For starters, a financial professional should be licensed for the products which they are offering guidance and selling. This means that for insurance products like annuities and life insurance, the contacts at your prospective retirement planning company should hold all required state insurance licensing.

If they would offer securities products, they should have all required securities licenses as well. 

Another manner in which financial professionals enhance their knowledge is through designations. There are specialized designations for different areas of financial planning. Some offered by the American College for Financial Services include:

• Retirement Income Certified Professional designation
• Chartered Financial Consultant designation
• Certified Financial Planner, or CFP designation
• Chartered Life Underwriter designation

You can ask prospective retirement planners about these and other credentials. They may also hold advanced degrees in finance, business, or other money-related fields pertaining to your needs.

Online research can also give insights into consumer perceptions of different companies. Google search results often include star ratings and actual reviews from other people like you. You may also find reviews on local review sites.

People in the insurance and financial industries are subject to regulations at federal and state levels. For instance, state insurance departments have records of insurance-licensed professionals in their respective states. You may check these to confirm insurance licensees are in good status in a particular state.

4. What are my options and how much do they cost? The cost of retirement planning services will depend on the type of products that you buy, the amount of money that you invest, and from whom you receive guidance and buy.

Some firms charge fees based on the percentage of assets that you invest or on the cost of products that you are purchasing. Others make commission from the products that they sell and are paid by the third party.

Yet still, others operate on an hourly or per-project basis for financial planning services, which means you may have to execute their recommended actions.

Many firms accumulate more than one type of fees by selling the two different products to their clients. They key, however, is ensuring that there is transparency in the way that your financial professional operates. During the interview and selection process, ask for information on how they are paid, and their fee/compensation structure(s). At the point of recommendation, be sure you understand any potential costs and/or fees built into the recommended products.

No matter who you work with, clarify how they guide and act in your best interest with recommendations. Is there any conflict of interest when it comes to the products they are recommending?

What is the retirement planning philosophy that they stand by? How will they make the right options work for you? These are all fair questions to ask when interviewing potential companies.

Choosing the Right Retirement Planning Company for You

While these questions are a good starting point, they are by no means exhaustive. Remember, this is your retirement future you are preparing for. Working with the right retirement planning company can lead to a more confident financial life, and it begins with careful due diligence.

Looking for retirement planning companies to guide you? Financial professionals at SafeMoney.com can help you. Use our “Find a Financial Professional” section to connect with someone directly. And if you need a personal referral, call us at 877.476.9723.

The post How to Find the Best Retirement Planning Companies (2024 Updates) first appeared on SafeMoney.com.