Jerry Golden on Retirement

5 ways to improve your investment returns in retirement

August 15, 2019 By Jerry Golden in Income Allocation Tags: Income annuities, low-fee, manage taxes, retirement savings

A recent New York Times article discussed ways to improve your retirement with investments in low-cost index funds. While it’s hard to argue against lower-cost funds for your stock market investments, particularly if they outperform higher-cost actively managed funds, the planning for earning high investment returns should start long before you choose a fund.

If you are ready to dive into more detail about how to improve your returns, keep reading. Following these steps will lead to more, and safer, income during retirement, driven in part by better investment returns.

1. Adopt a plan

Your retirement income plan is made up of several sources of income: dividends, interest, annuity payments and withdrawals. That income will be generated by applying your savings from a 401(k) or similar plan, personal investments in funds, stocks and bonds, and one or more deferred annuities. You built these assets separately. But with the right plan, they can all work together to provide reliable income while taking advantage of stock market ups-and-downs, and minimizing taxes. I have written extensively about how to put together an income allocation plan.

2. Allocate to your objective

The common advice is to create an asset allocation plan that divides your savings among cash, bonds and diversified stocks. If you want to have enough income through retirement, however, the better advice is to prepare an income allocation plan. Toward that end, identify a specific portfolio strategy for each savings source. For instance, put a portion of your personal savings in a high-dividend portfolio, and create a balanced portfolio for your rollover, or traditional, IRA.

3. Stay the course with safe income sources

The foundation of an income allocation plan is the creation of enough safe income to allow you to take more risk in the markets. Social Security is part of that foundation. Annuity payments paid for life are another. At the same time, you will be generating dividends and interest from your investments.

An important consideration: An income allocation plan does not attempt to match income to expenses. Create a separate spending budget that fits within your expected income. Ideally, your income sources will produce more than you spend each month, but a cash buffer will cover the times when there are unexpected expenses.

Whether the markets are rising or not, you will earn dividends from your personal savings investment. If the economy goes into recession and stocks fall, the balanced portfolio in your IRA (which will include a money market fund) can supplement your safe income with smart withdrawals until your stocks recover. And don’t forget the equity in your home, which you can access through a reverse mortgage or a line of credit. The best plans consider how every source of income complement each of the others.

4. Manage taxes

You can’t decide how much you will pay in taxes – the government does that for you — but you can manage your tax bill. Much of the decision will be determined by how comfortable you are with various types of income. Proper management of annuity payments within your income allocation plan can help reduce taxes on all your income, including Social Security. And you can take advantage of tax law to benefit your heirs as well. Your traditional IRA and 401(k) accounts come with rules about mandatory withdrawals, but those can be partially mitigated if you include QLACs in your portfolio.

5. Manage fees

A main point of the Times article I referenced above is that it pays to reduce investment management fees. You can justify higher fees if the performance is better, but as the article points out, actively managed funds often do not produce better results. That’s why I advocate a “Stay the Course” plan. Create sources of income you are comfortable with. And if you are in the market with some of your savings, stay in the market. Your advantage during the down times is that you will be perfectly positioned for the upturn.

A view of the whole

Our firm is an investment advisor because we do planning and not stock selection, which we refer to specialists. We believe that most of the pick-up in value is from the planning process and the five points above.

My next article will go into more detail about how you can make smarter retirement planning decisions with the right set of tools and analytics.

If you would like to talk to me directly, write to Ask Jerry and I will respond.

What will happen to your retirement if the Fed lowers interest rates?

July 25, 2019 By Jerry Golden in Annuity Tags: Fed lowers interest rates, Income allocation, Income annuities

News from the financial world has been confusing lately. Is the economy strong or about to bust? Is the inevitable recession close or still years off?

What will the Fed do about interest rates? We do know that over the past eight months, interest rates have decreased.

That helps homebuyers, and homeowners who are refinancing their mortgages.
It hurts retirees who count on interest from savings to provide a substantial part of their income.
And it typically raises questions for new retirees who are ready to set up their retirement income plan and make other lifestyle decisions.

These new retirees for the most part have seen 401(k) and IRA balances grow. But now they must convert retirement savings to income. For them, the question they often ask is, “Do I set up my plan now or wait until interest rates go back up?’’

My answer:

When it comes to retirement income planning, don’t try to time the market. Set up your plan with the flexibility to change, and in turn gain the peace of mind to stay the course.

Of course, my planning method is based on Income Allocation and includes annuity payments in the mix. I often have conversations with advisory clients who are attracted to annuity payments as a source of secure lifetime income; most, however, want to buy when 10-year Treasuries are peaking. Sure, it’s nice to imagine earning the top rates on everything, but as you will see, that doesn’t usually work. And it’s not necessary.

On November 8, 2018, 10-year Treasuries were at 3.24%. As of July 23, 2019, they’re at 2.08% — or more than a 35% drop. People who retired last fall are disappointed because they were planning to use up to 30% of their savings to purchase annuity payments. Because they waited, they’re going to have to revise their plans or reduce their budget. Or so they think.

They may not be worse off. Here’s why.

Purchase rates for income annuities do not follow interest rates directly. In fact, while 10-year Treasury rates went down 35%, annuity purchase rates went down only 4% to 5% (see explanation below).
The taxable portion of annuity payments fell by up to 50% during the period, reducing the overall projected tax bill.
And the value of the new retirees’ balanced portfolio of stocks and bonds increased by over 7.0% over the period, giving them more savings to apply to the annuity purchase and other sources of income.

Putting all those elements together, an Income Allocation plan actually could support more income than back in November.

Of course, not every eight-month period will operate with falling interest rates and an improving stock and bond market. My point is that when all of the financial elements of a plan are priced at the market (and income annuities are typically priced biweekly by annuity carriers to reflect current annuity crediting rates) then the key driver is how to bring those elements together in a plan to work for the consumer.

How annuity payments are calculated and set by insurance companies

Annuity payments are made up of three components.

Interest credits. These are guaranteed by an annuity issuer for the life of a contract. That interest rate is generally set every two weeks for new contracts. (Once you buy a contract, that annuity crediting rate is set for life.)
Return of principal. A portion of each payment is a small slice of the initial payment you made.

Survivor credit. In the simplest terms, your annuity contract is pooled with other income annuity purchasers. You get credit if you survive. For new contracts, those credits may be reviewed every few years. That amount doesn’t change with market interest rates.

So, two of the elements change very seldom if at all. The annuity purchase rates do change because of changes to annuity crediting rates. While the Federal Reserve’s actions affect short-term interest rates, there is no direct correlation to how annuity companies invest or how they price income annuities.

Build your retirement plan around income and not assets

An income allocation plan differs from asset allocation in that you create a plan designed for lifetime income with less market risk. Annuity payments replace a portion of the fixed income portion of your investment portfolio to provide guaranteed income for life. Not only does replacing bonds with annuity payments mean you don’t have to follow the ups-and-downs of the market, it also means you can be more aggressive, if you wish, in the stock portion of your plan.

On top of that, income annuities purchased out of personal savings offer benefits from the IRS that you won’t get from other fixed-income investments. The portion of your annuity payment that is a return of principal comes to you tax-free. While interest payments from municipal bonds also are tax-free, income annuities can help decrease your overall tax rate and offer better returns, as this article explains. So when building your plan for retirement income, consider annuity payments — whatever the Fed does.

Go2income analyzes the income annuity marketplace every month. We reverse-engineer the pricing of annuity payments to determine the level of annuity crediting rates. If you’d like to find out how insurance companies are incorporating interest rates into their annuity purchase rates contact me at Ask Jerry.

New ideas take patience and perseverance to become self-evident

July 1, 2019 By Jerry Golden in Annuity Tags: Annuities, guaranteed lifetime income, retirement income, tax benefits

The reasonable man adapts himself to the world; the unreasonable one persists in trying to adapt the world to himself. Therefore, all progress depends on the unreasonable man. – George Bernard Shaw

After four decades of inventing financial products that help people figure out how to retire comfortably, I am accustomed to the resistance these new ideas face. Please forgive me for trying to adapt the world of financial products to what I believe retirees and pre-retirees need.

As I’ve written about in this blog, I often critique financial advisers of all types who insist that their clients adapt their plans to the confines of whatever options the adviser’s business model supports. When it comes to retirement income planning, that model usually involves a pie chart of asset allocation, and a market simulation of when your income runs out.

My “unreasonable” view is that retirement income planning is about an allocation of income, and a plan that delivers that income for the rest of the retiree’s life.

Three consumers who know what they want

The people who decide to make lifetime income part of their retirement portfolio come from a wide variety of backgrounds:

The medical researcher. She learned enough on her own to confidently compare her retirement options. She used the money in her IRA to buy several income annuities, which along with her Social Security, will provide her with secure income in retirement.
The consultant and ex-pat living in Europe. Rather than rely on products in his country of residence, he decided to invest in the security of an income annuity backed by a highly rated U.S. insurance company.
The manager in the construction industry. His job required him to be aggressive and make many gut decisions. Now, he views the stock market as too rough and tumble, and is looking for the security for his family that income annuities will provide. He still has money in the market, and he can be more aggressive because of the income he can count on.

Stages of an idea

Years back when my company was rolling out a new form of annuity* to financial advisors, I employed several regional sales representatives, one of which, expecting pushback from these advisors, reminded me of the stages of an idea:

Ridicule
Resist
Embrace
Self-evident

I have found that consumers are much more open to new ideas than advisers, particularly if it’s outside the adviser’s area of expertise or their business practice. However, often times the biggest naysayers eventually become the biggest supporters, usually asking themselves and others, “Why haven’t we done this before?” It takes time for our solutions to become “self-evident” but in the meantime we’re here to work with consumers.

So what’s the big idea?

The concept is simple; the execution is sophisticated. Here’s the idea:

In planning your future retirement income plan, consider incorporating regular monthly annuity payments that are guaranteed, will last your entire life, are backed by a highly rated insurance company, receive favorable tax treatment and continue to your spouse or beneficiary at your election. Together with Social Security and any pension, they can form the foundation of your retirement income plan.

Borrowing a tag line from a well-known brand, “annuity payments don’t make your retirement; they make your retirement better.”

Making your retirement better is where the sophistication comes in, since planning requires a deep understanding of income annuities in order to answer questions like the following:

What’s the source of premiums for the annuity? Is it a traditional IRA, personal savings, deferred annuity?
What annuity payment features do you elect? Your life only, continue to spouse or beneficiary, fixed period?
Do you want annuity payments to start now, in the future, or both?
How much of your safe income do you allocate to annuity payments?
Do you pick the annuity carrier with the best rates or the best rating?
How does the favorable tax treatment of annuity payments impact your other planning decisions?

It’s the last point I discussed in my previous blog on lowering your retirement tax rate that got a lot of “resistance” even from my own accountant.

Why even bother with annuity payments?

Financial advisers may pose this question to you, almost “ridiculing” the idea.

Keep the following in mind where these advisers are coming from when responding:Insurance agents sell products, usually promoting product features; they don’t do planning involving investment products.

Investment advisers often have little or no experience with income annuities; they may not even be licensed to sell them.

Financial planners often build plans with software provided by third parties; that software doesn’t answer or ask the questions above.

Accountants are generally not familiar with income annuities, and their tax software doesn’t specifically explore the tax value that income annuities provide.

Financial publications generally favor income annuities, but they don’t have the space to address the more sophisticated decision process. And logistically they don’t offer personal counseling.

Why I embrace the benefits of annuity payments

Like nearly all the pre-retirees now making plans for their future, I am a Baby Boomer who has watched employers stop offering pensions, and has lived through a few market “corrections.” I can relate to the challenges you’re facing. Here is a sampling of articles I have written about the benefits of adding income annuities to your retirement planning:

Are you ready to make the decisions that will benefit your specific retirement? Contact me at Ask Jerry, and I will answer your questions.

*That new annuity spawned a $1 trillion industry.

How to lower your retirement tax rate to less than 10%

May 29, 2019 By Jerry Golden in Annuity

Is it true that retirement changes everything?

No, not literally. But it does significantly change many aspects of your finances, and the more you understand your new situation, the more money you will have available to spend or save.

How you set up retirement income to be taxed is complex — and a big part of retirement success.

I am surprised myself, in fact, by how much there is to learn. I’ve been studying annuities and retirement plans for 40 years and recently discovered calculations nestled within IRS schedules that might change your own plans for retirement.

Step 1: Read my article published by Kiplinger. Step 2: Repeat

May 28, 2019 By Jerry Golden in Income Allocation

You may have read this article in Kiplinger’s online magazine, in which I explain how to earn maximum tax advantages from your investment in income annuities. I republish it here, slightly modified.

Like most taxpayers, I am a fan of legally minimizing your income taxes. But I think — if you are retired or about to retire — you should concentrate less on minimizing taxes and more about increasing after-tax spendable income and your financial legacy to heirs. Sounds like a non-sequitur, but it isn’t.

As an example, you could invest your entire savings in high-quality intermediate-term municipal bonds and pay no taxes on interest earnings. But you would earn something like 2.5% (or $25,000 on $1 million in bonds) in annual income. Wouldn’t it be an improvement if you paid some taxes and generated an income stream equal to, say, 6% after taxes?

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