Retirement Income Planning

Stephan Leimberg

• Publisher: The National Underwriter Company
• Year: 2012
• ISBN:
  9781938130427
• Topic: Business
• Subtopic: Business Education
• Index: Business

Every financial planner must be prepared to address the emerging retirement income planning need to satisfy clients' perceived and actual security—based on psychological and behavioral finance issues unique to today's retirees. Specialized practitioners will understand defining/reducing risk, stochastic modeling and income planning research, as well as future trends facing Baby Boomer retirement. Complete with comprehensive strategy coverage and retirement planning insights. Discover how to develop custom models targeted at replacing the stability of a regular monthly paycheck while controlling withdrawals. Create a "personal pension"—one sustaining longer life spans and late planning.You've helped clients accumulate wealth for retirement. Now what? Income risk management—withdrawals, allocation &modeling Insured solutions—annuities, life insurance &living benefits Tax considerations—vehicles, planning, rollovers &distributions Investment strategies—bonds, reverse mortgages &combination investments

The Retirement Model is All-New. Empower yourself to excel at the financial services discipline dedicated to bridging the gap between wealth preservation and the strategies for extended income needs during retirement. Tools & Techniques of Retirement Income Planning is written by leading practitioners and packed with problems/solutions facing today's retirees and the pending Baby Boomers who will reportedly compose 20% of the total U.S. population by 2030.

Have you prepared your clients? Discover the ins-and-outs of fixed immediate annuities with "locking up income" and "hedging your bets" strategies. The immediate need for retirement income planning guidance and the readiness of advisors to meet that need is at hand. The authors discuss vast plan differences related to the health of your clients—from flexible cash flow aimed at contingency planning versus guarantees. A realistic retirement income strategy should extend beyond life expectancy. Chances are… you will want this invaluable reference in your personal library. Life Insurance, PACE, and CFP® CE Filed.Chapters to feature: the top 12Future Trends in Income Planning Psychological and Behavioral Finance IssuesDefining and Reducing RiskSustainable WithdrawlsTypes of Income-Generating AnnuitiesEarly Distribution Planning TechniquesStochastic ModelingAsset Allocation IssuesRole of Life InsuranceRollover Planning StrategiesReverse MortgagesRequired Minimum Distributions

PART 1: OVERVIEW AND BACKGROUND

CHAPTER 1: WHAT IS RETIREMENT INCOME PLANNING?

Most people reach a point later in life when they retire and stop working. Up until this time, they have generally been able to live off of wages earned from their jobs. When they retire, it is time to start living off of retirement income, wherever that may come from.

A person entering retirement may be ending some phases of life, while entering into new phases. It can be a time of many changes. It can be an emotional time for a retiree as the retiree defines what he means by retirement. It may be useful for the advisor to help the retiree deal with these issues as part of the retirement income planning process. What the retiree can, or would like to, do with his life is all part of the retirement income planning process. Chapter 2 discusses psychological and behavioral finance issues relating to retirement income.

There is a three-legged stool which generally provides the sources for retirement income: individual savings, formal (generally, business sponsored) retirement plans, and social security (and other governmental plans). Chapter 3 discusses funding sources for retirement income.

Studies have shown that many retirees depend a great deal on social security. However, due to a variety of reasons, there is good cause to be concerned about both the financial underpinnings of social security’s future as well as the relative level of security it can be expected to provide. Social security benefits are discussed in detail in Chapter 3.

In the past, many retirees received defined benefits from employer-sponsored qualified plans. In addition, employers often contributed to qualified plans an amount separate from wages. The employer often bore the investment risk and the employee knew what income he could expect from the plan.

There has been a precipitous decline in such qualified plans. (There is also some concern over whether those plans have been adequately funded.) Correspondingly, there has been an increase in plans, such as 401(k) plans, that shift and place the burden on the employee to decide how much of the employee’s current wage the employee would like defer to pay for future retirement income. Some plans may match part of the employee’s contribution. The employee could also make contributions to individual retirement accounts (IRAs).

With the concerns over social security and the drastic changes in employer-sponsored qualified plans, the third major source of retirement income, individual savings, acquires an even greater importance.

It is essential for the planner to understand the various risks that clients must assume and the methods to reduce or manage risk when doing retirement income planning. Failure to consider risk may lead to a failure to provide sufficient income for all of retirement. Understanding the meaning of diversifiable and nondiversifiable risks may encourage the use of asset allocation (see Chapter 6) and other portfolio techniques to minimize diversifiable risk in funds used for retirement income. Recognizing risks such as longevity and mortality may enable planning for such risks with devices such as annuities (see Chapters 8 through 10) and life insurance (see Chapter 11) to ensure that funds are available for retirement income for the retiree (and the retiree’s spouse) if the retiree (or the retiree’s spouse) lives too long or dies too soon. Understanding inflation risk may encourage the use of various bond strategies to minimize risk (see Chapter 17) and annuities with increasing payments (see Chapters 9 and 10). Chapter 4 discusses ways to define and reduce risk relative to retirement income.

When planning for retirement income, there is always the concern over where money should be invested, what risks (and the level of risk within each and in combination) should be incurred, what rates of return can be expected, how much income is needed, and will there be enough money. Chapter 5, on sustainable withdrawals, attempts to answer the question: “How much can be safely withdrawn/spent on a regular basis without an undue risk of running out of money or needing to reduce the future standard of living?”

Asset allocation involves selecting the proportions of various types of assets to include in a portfolio. Proper asset allocation can optimize returns, while reducing risk. Historically, the discussion of asset allocation for retirement income has often revolved around increasing the percentage of assets producing income and reducing longer term non-income producing investments as the time for retirement approached and as the retirement horizon (remaining time in retirement) decreased. This often meant increasing allocations in income producing bonds and reducing allocations in stock held for long-term gains. Chapter 6 discusses asset allocation issues for retirement income, including alternatives to those historical strategies.

Stochastic modeling (see Chapter 7) can provide various methods used to simulate ranges of outcomes for retirement income that are to some extent random and unpredictable. Such modeling may be used to simulate the probability of failure or success of various scenarios to provide adequate retirement income.

For a purchase price or premium, an insurance company can assure a stream of retirement income (an annuity) to an annuitant for a specified term of years or even for a person (or couple’s) life. An annuity for life (or the life of the retiree and the retiree’s spouse) can provide retirement income that the retiree (or the retiree and the retiree’s spouse) can never outlive. Therefore, an annuity can be a useful part in providing retirement income. However, there are a wide variety of types of annuities and annuity features and guarantees. Chapters 8 through 10 discuss annuities as part of an insured solution for retirement income.

In return for the payment of premiums on a life insurance policy, an insurance company agrees to pay death benefits to a named beneficiary. Such a policy could be used to provide retirement benefits to a surviving spouse. If the policy has cash values, the cash values could also be used to provide living benefits while the retiree is alive, which can be used to provide retirement income. Chapter 11 discusses the role of life insurance in providing living benefits that can be used as part of an insured solution for retirement income.

There are a wide range of tax favored retirement vehicles that can provide retirement income. Chapter 12 provides an overview of the retirement vehicles in which retirement assets may be invested. Additionally, that chapter includes an explanation of each of the vehicle’s federal income tax attributes along with examples demonstrating the power of tax-deferred and tax-free growth.

During retirement, there can be significant fluctuations in a retiree’s income for income tax purposes. These spikes and valleys may offer planning opportunities. Chapter 13 explores some significant and fairly common situations or issues around which income tax planning for retirees is particularly relevant: managing taxable income, controlling adjusted gross income (AGI), minimizing the tax bracket, and preferential dividend and long-term capital gains rates.

Rollovers are permitted between various qualified plans and IRAs. The effect of a rollover is generally to avoid taxes upon what otherwise would be treated as a distribution. Rollovers allow a person some flexibility to change trustee or custodian, investments, and, sometimes, tax characteristics or distribution methods. Chapter 14 discusses rollover planning strategies for retirement income.

A 10% penalty tax applies to early distributions from qualified plans and IRAs. In general, an early (or premature) distribution is a distribution made before age 59½, death, or disability unless another exception applies. However, the tax applies only to the amount of the distribution that is includable in income. Chapter 15 discusses early distribution planning techniques for retirement income, including substantially equal periodic payments (SEPPs).

Required minimum distributions (RMDs) must generally begin by age 70½ (or retirement, if later, in the case of a qualified plan) or death. However, planning should start before age 70½ or death. It is important to have a designated beneficiary to insure that the right beneficiary is named and that distributions are stretched and therefore income tax is deferred for as long as possible. Chapter 16 discusses required minimum distributions for retirement income.

Bonds are long-term debt obligations offered by various entities, including corporations, the federal government, and municipalities. Most bonds pay interest periodically (usually semiannually) and pay a stated redemption price at maturity. Most bonds pay a fixed amount of interest semiannually for the period until maturity. As a result, bonds are often used as part of a retirement income solution. Chapter 17 discusses strategies for bonds.

For many individuals, equity in a home can be a significant source of retirement income. A reverse mortgage allows an older (at least age 62) homeowner (or husband and wife homeowners) to convert equity in a home into cash without selling the home or incurring additional mortgage payment obligations. In a reverse mortgage, the lender makes payments (loan amounts) to the homeowner. The homeowner generally does not have to repay the reverse mortgage loan until the homeowner dies, sells the home, or moves from the home. Chapter 18 discusses use of a reverse mortgage to provide retirement income.

Retirement income planning can be extremely complex. As already observed, there are a wide variety of investment, tax, and other retirement strategies that can be employed, as well as a variety of techniques for evaluating the possibility of success or failure. One size clearly does not fit all. Various combinations of strategies should generally be considered. Chapter 19 discusses how retirement income strategies can be combined.

Chapter 20 presents some of the authors’ takes on future trends in retirement income planning.

CHAPTER 2: PSYCHOLOGICAL AND BEHAVIORAL FINANCE ISSUES

WHAT IS IT?

Retirement is a time of changes: in self-identity, in relationships with others, in the abilit...