Planning for retirement doesn’t necessarily get easier with age

Planning for retirement doesn’t necessarily get easier with age

Posté le February 22, 2015 par Ressources Soins Aînés Québec en Blog - English, Centre pour Ainés, Communauté de retraités, Droit des aînés, Éducation, Éducation aux Aidants, Personne Autonome

7:16 AM EST DEC 22, 2014

Planning for retirement doesn’t necessarily get easier with age. As one of the most complicated moves individuals make in their lives, retirement planning is chock-full of confusing terms that can be hard to understand.
So we asked a group of retirement-planning specialists to chime in on the words and phrases that they think pose the biggest problems for people nearing retirement.
Their answers are below, in a discussion that relates to the latest Encore Report and formed the basis of a discussion on The Experts blog in December.
  • How Withdrawal Rates Trip Up Retirees

    BILL REICHENSTEIN: What financial term do you wish those nearing retirement better understood? “Sustainable withdrawal rate.”

    Suppose you retire in your mid-60s. What percent of your financial portfolio can you withdraw the first year of retirement if you plan to withdraw an inflation-adjusted equivalent amount each year thereafter, and you want to be reasonably confident that your portfolio will last 30 years?

    The old rule-of-thumb was that if you have at least a 50% stock exposure then you could withdraw 4% the first year.

    With today’s low interest rates and even assuming the additional returns on stocks compared to bonds hits its historic average, the new safe withdrawal rate is about 3.3%.

    So, if your financial portfolio is worth $1 million then you could withdraw $33,000 the first year, an inflation-adjusted equivalent amount each year thereafter, and be reasonably confident of not running out of money within 30 years.

    Furthermore, you should understand the qualifications on this 3.3% withdrawal rate. First, you must maintain a reasonable exposure to stocks. Second, if your financial assets are primarily in tax-deferred accounts like traditional IRAs and 401(k)s then that $33,000 is primarily pretax dollars. Spending requires after-tax dollars. Third, these studies ignore investment-management expenses. If the all-in cost of a financial adviser, mutual fund managers, and trading costs (including managers’ trading costs) is 1% then your safe withdrawal rate would be about 0.5% lower. Finally, this rule assumes you will plan for a 30-year retirement period.

    Admittedly, most mid-60s retirees don’t live 30 years.

    Suppose, if single, your life expectancy is 25 years or, if married, the life expectancy of the second spouse to die is 25 years. Then you probably want to plan for a longer-than-25-year retirement period to provide some assurance of not outliving your financial resources.

    Thus, for many retirees, a 30-year planning horizon is reasonable.

    William Reichenstein is Powers Professor at Baylor University and head of research at

  • The Case for Reverse Mortgages

    WADE PFAU: What financial term do you wish those nearing retirement better understood?

    Reverse mortgage. Reverse mortgages have received a bad reputation, but recent research has demonstrated how financially responsible individuals can improve their retirement sustainability with a reverse mortgage. The issue is that financial services are still mostly focused on wealth accumulation, and there is still a need for greater recognition about how retirement income requires a whole new host of tools as people seek to transform their pot of assets into an income for life. This is especially true for individuals who hold a disproportionate amount of their overall wealth in the form of home equity. What a reverse mortgage can do is increase a retiree’s flexibility to meet spending objectives by integrating an otherwise illiquid asset into an overall framework for how to best spend down assets in retirement.

    The research I mentioned includes a series of articles in the “Journal of Financial Planning” by authors such as Barry Sacks, Harold Evensky, John Salter, and others. The process involves opening a standby line-of-credit through the Federal Housing Administration’s Home Equity Conversion Mortgage (HECM) program. The line-of-credit will grow throughout retirement as long as the individual remains in his or her home and meets other requirements, and it can be accessed to meet spending goals when deemed appropriate. The researchers found that part of the success of this strategy is that it alleviates the sequence-of-returns risk in retirement, which results from retirees digging a hole for their portfolio by selling assets after a market decline. Proceeds from the line of credit may be repaid when markets recover, but repayment isn’t required until the individual has left the home.

    These reverse mortgages are also nonrecourse, which means that one never owes more than the value of the home. This can be useful in the event of declining housing prices, and for someone living sufficiently long, there is real possibility that the line-of-credit will actually grow to be more than the value of the home. Mortgage insurance paid on any outstanding balance is what will be used to make the lender whole in such cases.

    For individuals who are planning to downsize, or who are otherwise thinking to move in retirement, an alternative now available is the HECM for Purchase. Downsizing combined with the HECM for Purchase can potentially free up a large amount of home equity and create more liquid financial assets to help sustain a retirement spending objective over retirement.

    Wade D. Pfau (@WadePfau) is a professor of retirement income in the Financial and Retirement Planning Ph.D. program at The American College. He blogs on retirement research and maintains the Retirement Researcher website.

  • What Retirees Need to Know About ‘Average’ vs. ‘Marginal’ Tax Rates

    JONATHAN GUYTON: The misunderstandings around “average tax rate” and “marginal tax rate” would merely be amusing if they didn’t cost individuals and families so much money.

    Both answer the question, “How much do I pay in income taxes?” One’s “average” (or “effective’) tax rate tells the overall percentage of their income paid in taxes. One’s “marginal” tax rate reveals the percentage of tax paid on their last (marginal) dollars of income. Making decisions based on the former is what can be costly. Why? Because most retirees, at least for a while, have wide latitude in when some of their yet-untaxed retirement resources will be taxed. And because federal tax brackets rise in steps of varying size, there’s a great chance to mislead yourself into some unfortunate timing.

    Presently, we have seven tax rates (brackets) for ordinary income: 10%, 15%, 25%, 28% 33%, 35%, 39.6%. These are marginal, not average, rates. As income-after-deductions (“taxable income”) moves through one bracket into the next, they combine to determine your total income tax (and average tax rate). Many retirees quickly “use up” the 10% bracket. However, the 15% bracket covers a surprisingly large income amount: up to $73,800 for couples and $36,900 for singles in 2014, expanding yearly for inflation. Beyond these amounts comes the largest jump in marginal rates–a 67% increase–up to 25%. It is also here that the tax rate on qualified dividends and realized capital gains goes from 0% to 15%. Crossing this threshold is a big deal. The next bracket is a much smaller 12% increase, from 25% to 28%. And here at 28% you stay until your taxable income exceeds $226,800 for couples or $186,300 for singles.

    An example may best illustrate the costly misunderstanding. Consider a 73-year old single retiree with no wages and who receives monthly income of $750 from pension and $1,500 from Social Security. In addition, she has amassed a $900,000 nest egg of which $700,000 is a tax-deferred IRA and $200,000 is after-tax money in a brokerage account; from these she withdraws $3,000 and $750, respectively, monthly. Thus, her total income is $72,000 or $6,000 each month. However, her reportable income (“adjusted gross income” or AGI) isn’t this high; it’s $65,000 instead. This is because only $15,300 (the maximum 85%) of Social Security is includable, and just $4,700 of the brokerage account’s dividends and realized gains count. She also has a small mortgage and other deductions totaling $14,000. Combined with her personal exemption, this reduces her AGI by $18,000 to a taxable amount of $47,000 of which $42,300 is “ordinary income,” generating a $7,136 Federal tax bill.

    So what is her tax rate? Her $7,136 in taxes is 9.9% of her $72,000 retirement income. Her “effective” tax rate, based on her $65,000 AGI is 11%. And her marginal tax rate? Because her taxable income exceeded that key $36,900 threshold, each dollar of “ordinary income” above that (from Social Security, pension and IRA withdrawals) was in the 25% bracket. That’s way above the 9.9% of her total income! And that 25% is the rate that matters most.

    (If you’re a married couple, consider that each of these income sources, deductions and investment amounts was double the amount for our single retiree. This exactly doubles the taxable income to $94,000; Federal income tax also doubles to $14,352. The average tax rate remains 9.9%, and the marginal tax rate is still 25%.)

    The key is those last $5,400 “ordinary income” dollars above the $36,900 threshold; they came from IRA distributions. And they are taxed at 25%. Without them, her tax bill falls by $1,350 to $5,786. The average tax rate on a $66,600 total income falls a bit to 8.7% from 9.9%. However, the marginal rate drops from 25% all the way to 15%. Must this $5,400 of income be foregone? Not at all. It could be replaced by more nontaxable withdrawals from her after-tax brokerage account. Going forward, as the 15% bracket grows by inflation, the withdrawal mix could shift back toward IRAs. The same logic and strategies apply between the higher marginal brackets, as well.

    While average tax rates make for interesting cocktail hour or coffee talk, it’s with marginal tax rates that the money talks. Knowing the difference can’t keep tax-deferred dollars from being taxed eventually. But it can help keep more of your wealth right where you want it to stay.

    Jonathan Guyton is principal at Cornerstone Wealth Advisors, Inc., a fee-only advisory firm in Minneapolis.

  • What Those Nearing Retirement Don’t Know About Financial Planning

    BUD HEBELER: Of all the financial terms those nearing retirement should know, I think “financial planning” is often the least understood. The ultimate goal is to get a practical and realistic retirement budget backed by a sound set of investments. Financial planning is a lot more than the common conception of buying sound and growing diversified securities.

    Part of financial planning includes an understanding that we can improve our overall investment growth using allocation targets and periodic rebalancing. Rebalancing while working and making regular savings deposits helps with dollar-cost-averaging (DCA) in which you buy more shares when the market is down and fewer shares when the market is up. On the other hand, retirees must take regular withdrawals and often therefore suffer from reverse DCA. Nevertheless, rebalancing periodically helps retirees, too.

    Financial planning means having a meaningful projection involving your preretirement saving and your postretirement spending. You can get some help from free Internet sites that do no advertising or a professional planner who you can find on If in a do-it-yourself mode, make sure that you aren’t optimistic when choosing inputs for returns, inflation and tax rates. The unforeseen events in retirement take heavy tolls. That may mean a sudden drop in stock values near your retirement date, a spurt of inflation, a parent or adult child needing money, a spouse putting on pressure to remodel or relocate, an uninsured dental, eye or ear problem, and so forth. These are all one way trips toward a sudden loss of future purchasing power.

    There are also hidden creepy things that take a small toll each year, but that toll compounds just like investments compound, except that this compounding is negative. Think particularly about investment costs, which at values of 1% or 2% seem like small numbers, but they can easily take half of your investments over time because 1% or 2% is a large fraction of your returns on investment.

    Another insidious creepy thing is health deterioration. It will happen, either bit by bit or after some major illness or injury. The elderly have greater need for health care, particularly health care that is expensive. Health insurance costs tend to creep faster than inflation, and uninsured costs creep even faster. It’s important to have a realistic view of both Medicare and private (Medigap) insurance and make planning decisions accordingly. Medicare Parts B and D are a big chunk of money taken directly from your Social Security check.

    People tend to underestimate how long they will live when doing financial planning. Life-expectancy has grown considerably—and that only measures the average age to die without consideration of the 50% of the population that will live longer, some a LOT longer. Running out of savings prematurely isn’t only a financial problem, it’s a burdensome stress issue, as well.

    Then there is the matter of long-term-care (LTC) that may add several more years to your lifespan. It takes lots of guessing whether you will need it, and if so, for how long and at what cost. Financial planning means making a conscious decision whether to buy LTC insurance or to self-insure. This can also involve a judgment about whether a relative might be likely to assist and whether you want to impose that kind of burden.

    Another part of financial planning involves wills, power of attorney and health-care directives. Your financial plan may include anything from a simple will to a very complex one that may leave a trustee or survivor with serious financial planning issues, too.

    Financial planning can never be perfect, but I learned from many years of corporate planning that being conservative generally means being realistic.

    Henry “Bud” Hebeler was president of the aerospace division of Boeing Co. He has served on the board of MIT’s Sloan School and currently focuses on the dissemination of free, sound financial planning on

  • How to Avoid Outliving Your Retirement Savings

    DAVID BLANCHETT: One financial term I think those nearing retirement should better understand is longevity risk. Longevity risk deals with the risk of outliving your savings. People are living longer, and this means the cost of retirement keeps increasing.

    We can’t know how long we’ll live. But what we can do is become better educated on life expectancies. Life expectancy is the average number of years an individual is expected to survive at a given age. For example, the life expectancy today for a newborn is approximately 78 years. The life expectancy today for a 65-year-old is approximately 20 years (i.e., living until age 85).

    So what’s the right retirement planning period?

    First, the expected length of your retirement should be longer than your life expectancy, since you want a cushion should you live longer than average. For a 65-year-old today in average health, I think the minimum period should be 25 years. For a couple, both age 65 and in average health, I think the minimum period should be 30 years.

    However, these are for retirees today. Individuals (or couples) who are younger (e.g., age 25) could easily need to add five or more years to projections because by the time these younger people eventually retire, life expectancies will be even higher (something actuaries call expected improvement in mortality rates).

    For those who believe they’ll live very long—past age 95—or for those who don’t want to have to worry about longevity risk, there is longevity insurance. Also known as a deferred income annuity, longevity insurance offers guaranteed income that kicks in later in retirement at a predetermined age. The longer the period from when you purchase the longevity insurance until the income starts, the higher the payout.

    David Blanchett is the head of retirement research for Morningstar Investment Management.

    SOURCE :