Bob Fay

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Wednesday, October 7, 2015

How to draw down your retirement savings

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COMMENTSJoin the Discussion
Saving for retirement is challenging, no doubt. But if you want to know what's really tricky, consider spending that money in retirement.
Retirees in the past often relied on a simple rule for retirement income: Draw down 4 percent of your savings every year and you will be all set. But the retirement landscape has changed.
For one thing, people are living longer, and their money has to last all that time. One in four people who are 65 years old today will live to age 90, and one in 10 will live to 95. (Tweet This)
Low interest rates also complicate the picture for savers. A one-year certificate of deposit came with a yield of just 0.28 percent, on average, through most of September, according to Bankrate. That's hardly enough to generate much retirement income.
Then there is the changing nature of retirement saving itself. Many people retiring now are able to count on pension and Social Security payments for the bulk of their retirement income, with investment income the icing on the cake. An AARP Public Policy Institute analysisof Census Bureau data found that in 2012, median income from Social Security for those receiving it was $13,972, and median income from pensions and retirement savings was $12,000. For these people, drawdown decisions matter, but represent just a portion of retirement income.
But as more and more people retire without defined benefit plans, their own savings, often in 401(k) accounts, will be increasingly important — and investors' choices about how to use them will be more complex.
"You need to have the safety in terms of predictable income, and you need to have part of your portfolio in risk assets. You could be looking at 30 years" of retirement, said Dan Keady, senior director of financial planning at TIAA-CREF.
Some investment pros say the 4 percent rule, first broadly proposed byWilliam Bengen, a former financial advisor, in 1994, can still apply, but differently. 
"We talk about the 4 percent guideline as a starting point," said Judith Ward, a senior financial planner with T. Rowe Price.
Take longevity, for example. At T. Rowe Price, financial planners recommend that people planning for retirement assume that their money will have to last for 30 years, said Ward. Clearly, if retirement assets remain flat, a 4 percent drawdown will not last that long.
That's why Ward and others recommend that retirees use a 4 percent withdrawal rate as a loose target, but then adjust their drawdowns depending on market conditions. When markets are in a downturn, "great, tighten the belt," Ward said. Conversely, a strong market can enable retirees to draw down a bit more, since they will still be leaving plenty of savings in the portfolio.
"People need to every year come back and look what's going on," Ward said.
Another approach is to consider annuitizing some retirement savings. Annuities have gotten a bad rap at times for high fees and opaque terms, but as Americans live longer, more experts are pointing to them as tools to help your money last.
"An annuity is really like an additional pension for some people," said Keady, adding that it "adds some stability to where you are getting your income."
In addition to providing more stable income, annuities help offset the risk that investors will outlive their assets. And having an annuity that throws off income reduces the chance that retirees will have to draw on invested savings at a time when the market is weak.
"Most people don't want to be paying for basic, necessary expenses out of something that gyrates up and down," Keady said.
One annuity option to consider is longevity annuities, which start paying out at some date in the future, like when an investor turns 80. The investor spends less for the annuity because of the delay, but receives protection against outliving savings.
Last year, the Internal Revenue Service added an incentive to consider longevity annuities: Money that goes into those contracts is not counted when the government calculates the minimum required distribution of your retirement savings.
Whatever you do, it's wise to start considering these questions sooner rather than later. Advice on saving for retirement is a lot more abundant than advice on how to draw down the money you salt away.
The good news, said Ward, is that that is starting to change. For financial experts, "I think its going to become much more the focus as the baby boomers start to retire in greater numbers," she said.
Even if you don't develop a full plan, thinking about the income you will have in retirement can encourage you to focus harder on saving.
"[People] begin not thinking about the nest egg, but they begin thinking about the income that can be produced from that nest egg," Keady said. "All of a sudden, people realize, 'Wait a second, I actually have to replace a paycheck.' "

Hidden costs of retiring abroad


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As many as 3 million baby boomers in the U.S. plan to retire abroad, according to trade publication the Travel Market Report. With relocation, however, come other complications, such as navigating currency markets.
Hidden foreign-exchange fees are the No. 1 culprit in dwindling your hard-earned retirement savings in another country. Exposure to the volatile currency markets on a daily basis can add up quickly in the form of unwanted fees.
Senior couple walking on jetty in tropics
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The first such fee is what's known as a transfer fee, which can cost $15 to $100 per transfer of money to the foreign location of your choice. If there are regular transfers on a monthly basis, those fees will rapidly add up.
But the biggest expense factor is the exchange rate itself, said Michael Ward, CEO of currency exchange service USForex.
According to Ward, currency specialists offer additional tools to structure and protect nest eggs against currency exposure. "We see significant savings we can pass on to retirees, compared to the financial institutions many are dealing with," he said.
Once retirees have checked transfer fees and exchange rates off their fix-it lists, they can start thinking about immersing themselves not only in their new surroundings and the local culture but also the financial markets in their new country as well.
The dream to retire abroad can become reality—if done right.

Monday, August 17, 2015

The biggest Social Security mistake women make

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Is 62 too young to claim for women to claim Social Security?

That is the age at which both women and men are allowed to claim, and sure enough, 40.8 percent of the women who were newly awarded Social Security retirement benefits in 2014 were aged 62. Some 65 percent were below their full retirement age, typically 66. And just 2.8 percent of the women were 70 or older, the age at which they receive their maximum Social Security retirement benefits, according to Social Security Administration data.

Often, both women and men reflexively claim Social Security when they retire. "People don't realize the options out there. They think, 'Oh, I retired, I need to file for Social Security,' " said Shawn Britt, director of the advanced consulting group for Nationwide Insurance.

And women retire at an average age of 62, a figure that has barely budged in a decade, according to a study by the Center for Retirement Research at Boston College.

"Earlier drivers of working longer are no longer having a substantial impact," the study concluded.

Unfortunately, that creates a major problem for older women. The Social Security Administration reduces benefits for people who claim before their full retirement age, so by filing when she is first eligible, a woman is setting herself up for a Social Security benefit reduced by as much as 30 percent for the rest of her life.

It would be one thing if women generally had other significant sources of income in retirement. But according to Britt, women are five times as likely as men to live only on Social Security.

Women who are counting on spousal benefits from Social Security also see their payments diminished if they file before full retirement age. At full retirement age, a woman would be eligible for either her own full benefit or half of her spouse's, whichever is larger. But if she files at 62, she would only be eligible for her reduced benefit or as little as 32.5 percent of her partner's.

Their early claiming of benefits may be one reason why nearly 2.9 million women over 65 live in poverty, more than double the 1.3 million men in poverty, according to the National Women's Law Center. (Not only do men tend to earn more over their lifetimes, they also retire at age 64, on average, the Center for Retirement Research found.)

But there is an easy way for women to boost their income in later life. A woman who holds off on collecting Social Security after her full retirement age will receive delayed retirement credits that will boost her benefit as much as 8 percent for every year she waits until age 70. In other words, a woman whose full retirement age is 66 would receive a benefit reduced by as much as 30 percent if she retired at 62, but if she waited until age 70, it could increased by as much as 32 percent.

All in all, delaying a Social Security claim from age 62 to age 70 can increase the value of the benefit by as much as 76 percent, according to research by David Laster and Anil Suri of Merrill Lynch.
"For a retiree with pressing financial needs or a short life expectancy, it may be best to claim benefits as soon as possible. But for many others, current research suggests that waiting to claim Social Security can substantially increase expected lifetime benefits and reduce the risk of outliving their wealth," they wrote.

That is particularly true in today's low interest rate environment. The "return" on waiting to claim Social Security is well above the yield on a low-risk asset like a 10-year Treasury bond, for example.
People may also believe that if they hold off on receiving Social Security income until 70, the cost of delaying will outweigh the higher income they start receiving at age 70 for years, perhaps until they reach 85 or 90, Britt said. But in reality, she said, the break-even point is closer to age 80. That is well below the life expectancy of age 86.6 that the Social Security Administration calculates for women turning 65 now.

In addition to delaying their initial Social Security claims, women have other options for boosting their Social Security income. Joan Entmacher, vice president for family economic security at the National Women's Law Center, pointed out that married women with higher earning spouses can have the spouses file for Social Security at full retirement age and suspend, or defer, their own receipt of benefits.

The woman can then begin claiming a spousal benefit but continue working, allowing her own Social Security benefit to grow until she reaches age 70. The spouse's benefit will also continue growing until age 70. If they both claim benefits at that point, they maximize their Social Security income.
"At 70, you've got a substantially higher benefit that will continue for the rest of your life," she said.
Britt pointed out that women who have been divorced after at least 10 years of marriage may have another way to boost their Social Security benefit: by using their ex-spouse's benefit.

"I can't tell you how many divorced women don't realize they may be able to collect off their ex-husband's Social Security," Britt said. "The Social Security office can even tell them what the amount is. They don't even have to go to him." Women divorced after 10 or more years are eligible for a benefit equal to half of the ex-spouse's, so if that exceeds what she stands to receive on her own, she can claim that.

Social Security officials are now allowed to advise beneficiaries on the best strategy for claiming benefits, but a financial advisor can help, too. For women who do not have advisors, local libraries sometimes offer workshops and seminars. AARP also provides a Social Security benefits calculator that can help you decide how to claim.

Anyone can benefit from sorting out how to claim Social Security, but women will find it especially valuable, Britt said. "Learning about Social Security is even more important for women than men because they live longer," she said, noting that for women who are 65 today, one in four will reach 90. "A woman's biggest concern is outliving her income sources," she said.
This is the second part of a week-long CNBC.com series on the state of Social Security on its 80th anniversary.


Can 'file and suspend' boost your Social Security benefits?

Can 'file and suspend' boost your Social Security benefits?


There are few free lunches in retirement planning. For married couples, a Social Security claiming strategy known as "file and suspend" may be one of them.

Here's how it works: A person files for Social Security retirement benefits at full retirement age, but then suspends payment of them. By filing for benefits, that person's spouse and dependents are eligible for retirement benefits at the time of the filing. And by suspending the benefits, the person can still earn delayed retirement credits that increase the future retirement benefit by 8 percent per year until age 70.

"People are leaving money on the table," said David Leland, a Merrill Lynch financial advisor in Beverly, Mass. "It's not as simple as both spouses maxing out their Social Security by waiting to claim them at age 70. Couples may be missing out on benefits for lack of knowing."

For example, Leland estimates a file-and-suspend strategy for one married couple he advised will generate an additional $50,000 to $60,000 over their lifetimes. Generally, it makes sense for the top earner of the couple to file and immediately suspend his or her retirement benefit, while the other claims a spousal benefit, which would be half of the top earner's benefit. (The Social Security Administration will not allow both members of a couple to collect a spousal benefit off the other spouse's suspended benefit.)

Your full retirement age is the lynchpin to file and suspend. You only have the ability to file and suspend benefits once you reach that age, which is 66 years old for those born between 1943 and 1954 and 67 for those born in 1960 or later. Full retirement age rises gradually from 66 to 67 for those born between 1955 and 1959.


Couples should wait until the older spouse turns 60 to figure out exactly what claiming strategy would be best for them, said Alina Lee, director of financial planning at Cassaday & Co. in McLean, Va. That's because they will have a better sense of what their Social Security retirement benefits will be. Health and work considerations should also factor into Social Security claiming strategies, she said.

Free online resources can help married couples navigate what claiming decision to make. Sites like AARP and SmartAsset provide free Social Security benefits calculators, and online financial advisory firm Financial Engines offers a free Social Security planner. The company said the tool has identified more than $10 billion in additional Social Security benefits for customers in the past year, and the median amount of additional benefits the typical married couple received has been more than $100,000 over their lifetimes.


File and suspend is a relatively new strategy. It was permitted in 2000 by the Senior Citizens' Freedom to Work Act to give married couples more flexibility in planning their retirements. Shortly thereafter, financial advisors and benefits experts began promoting file and suspend as a way for couples to boost their retirement income.

The financial crisis amplified retirees' interest in Social Security claiming strategies as their retirement savings declined with the overall market, Leland said.

There are some concerns that the option might disappear. President Barack Obama's proposed budget for fiscal 2015 hinted at the possibility, proposing "to eliminate aggressive Social Security claiming strategies, which allow upper-income beneficiaries to manipulate the timing of collection of Social Security benefits in order to maximize delayed retirement credits."

But the political flack hasn't diminished interest from clients, Leland and Lee said. And any change to Social Security benefits would have to be approved by Congress and would likely not affect those in or near retirement now.

The key with any Social Security claiming strategy is to think about the ramifications it will have through what may be decades of retirement, Leland said. "Some people spend 15 to 20 minutes on the decision, but it can be the most important one they make," he said.

Monday, August 3, 2015

Government programs play bigger role for health insurers

Government programs play bigger role for health insurers

COMMENTSStart the Discussion
As Medicaid and Medicare celebrate their 50th anniversary, the government health-care programs are now one of the biggest drivers of growth for private-sector health-care companies.
Nearly one out of every three Americans is now covered by Medicare or Medicaid, and the private insurers are playing a bigger role in administering those plans.
Insurers this year will see nearly $586 billion from Medicare and $449 billion from Medicaid, versus $400 billion from private insurance, according to estimates from Leerink analyst Ana Gupte.
Healthcare
Jose Luis Pelaez I Blend Images | Getty Images
"People with government health care, that number is growing while the number of people with private insurance with their employer is starting to shrink a little bit," said Ceci Connolly, head of the PwC Health Research Institute. "So, it's a matter of … where the numbers are shifting."
That shift is partly what is driving consolidation within the industry, Gupte said.
"They're trying to capture the growth in Medicare and Medicaid better. And not all of them have equally good exposure to it," Gupte added.
As aging baby boomers have gained coverage, more of them have chosen to buy private Medicare insurance plans over traditional Medicare. In the last decade, the percentage of seniors buying Medicare Advantage plans has more than doubled, from 13 percent to 31 percent, according to data from the Kaiser Family Foundation.
"I think having the private sector more deeply involved in the government programs is likely to make them better," said professor Len Nichols, the director of the Center for Health Policy Research and Ethics at George Mason University. "The public sector has learned from the private sector how to specify the conditions of the contracts with these companies."
But making a profit on the government plans can be a challenge, because the profit margins are slimmer, leaving less room for error.
Humana has been dogged by poor margins on its senior health plans this year because of high medical usage by its members. The nation's largest Medicare plan provider, which has agreed to be acquired byAetna, expects to get a better handle on costs in the next year.
As they become more dependent on government health-care plans, insurers also become more exposed to political risk, particularly for Medicaid, which is controlled and partly financed by state governments.
"When the economy gets tight and the politicians are looking to balance a budget, that's a natural pot of money—they're big pots of money—they look to squeeze down," said PwC's Connolly.
On the national level, the rising costs of these entitlements could also be a big issue in the 2016 presidential election.
"To some degree, the next election will have an impact," observed Leerink's Gupte. "I think there will be some differences depending whether there's a Republican or Democrat in the White House, as to what happens to these entitlements."
But on the flip side, Len Nichols says having big insurers now more involved in government health care could benefit Medicare and Medicaid recipients when those programs come under political pressure.
"It gives them now in a way, leverage, and maybe even a voice on behalf of their clients who are the most vulnerable people in our population."
Some in Congress feel particularly protective of those programs. "We must not allow the promise of Medicare and Medicaid to be undermined or be betrayed," said House Minority leader Nancy Pelosiat a Democratic congressional event celebrating the half-century mark for the two programs.