What Is Your Retirement Number?

Have you figured out your retirement number, yet?  Until recently, I had never heard of the extremely helpful retirement planning book called "The Number: What Do You Need For The Rest of Your Life and What Will It Cost?"

This is one of the more fascinating retirement planning books I have read.  To make it even better, the author includes a touch of humor in the way he discusses this very serious topic.  It was even mentioned in a recent segment on "Good Morning America."

What I appreciate most about this book is that it gives you simple, easy-to-follow guidance in coming up with a reasonable estimate of the amount of money you need to save and the amount of income you should have in order to enjoy the type of retirement that will be comfortable for you.  This is not an average of what most people need; it is a way of estimating the very specific needs of you and your spouse.

What Numbers Do Retirees Need to Know?

Retirement Income:  Have you come up with an estimate of how much income you will have when you retire?  How much will you need?  This author estimates that most people will need about 85% of their final working income.  In other words, if your last year's salary was $75,000, then you will need about $64,000 a year to retire with a lifestyle that is similar to the one you enjoyed during your working years.  Of course, if you make dramatic changes, your actual expenses could be higher or lower than that.  How are you going to reach that $64,000?  Half of it or more could come from Social Security.  The rest will need to come from a pension, a retirement job or investment income.

Retirement Savings:  This book suggests that people should have put aside eight times their last year's income.  If you are earning that same $75,000, that means you should have saved $600,000.  Again, this may change from person to person depending on other sources of retirement income you may have and your planned lifestyle after retirement.  Some of this retirement savings may be what you have put aside in an IRA or 401(k).  Some of it could come from the equity in your home or other property if you sell it and move someplace less expensive.

Withdrawal Rate:  While there was a time that people estimated they could withdraw 7% a year from their savings, this is considered far too aggressive today.  Instead, most people should limit their withdrawals to about 3% to 5% if they want the money to last the rest of their lives.  It is best to withdraw less in the early years and more in the later years when you may not have the ability to work part-time or do other things to supplement your income.  If you have managed to accumulate the $600,000 mentioned above, at 3% this would come to about $18,000 in income a year.  At 5%, this would amount to about $30,000.  If your goal is to reach the $64,000 in retirement income that you would need to replace a $75,000 salary, and you and your spouse together have at least $34,000 in Social Security benefits, then this gives you "your number."

This book is not only informative, but humorous and will help many Baby Boomers, as well as younger adults, put more thought into how they are going to achieve their number ... and what they will do if that number seems impossible to achieve.  Don't worry.  This book will not leave you feeling as though there is no way for you to reach a "number" that will work for you.

If you would like to pick up a copy of this book, here's a quick link to help you find it on Amazon:

"The Number:  What Do You Need For The Rest of Your Life, and What Will It Cost?"

If you want to read about other approaches to retirement planning, use the tabs at the top of this page to find links to hundreds of articles about money issues, family relationships after retirement, health concerns, and where to retire, both in the United States and other countries.

You are reading from the blog:  http://www.baby-boomer-retirement.com

Photo credit:  www.morguefile.com

How to Manage Your Retirement Funds Yourself

Recently, this blog has covered the issue of converting your retirement savings into retirement income.  I have discussed rolling over your 401(k) into an IRA, choosing a good investment adviser and how to select an annuity for retirement income.

However, what if you do not want to hire an investment adviser, buy an annuity, or let someone else manage your money?  What are the do-it-yourself options for selecting the best investments and funds?

Use a Discount Broker

Discount brokers like Schwab and TD Ameritrade have large menus of products that are geared towards people who feel confidant in their ability to choose their own investments.  Both of them have NTF (no-transaction-fee) funds from which you can choose.  However, this does not mean that there are no hidden costs involved with the selection of these funds.  For example, Vanguard and Dodge & Cox will not pay the necessary fees that would make their funds available to consumers for free.  Since these two companies operate some of the best-performing funds, you could lose out on potential future performance if you opt for a less successful fund simply because you do not want to pay an up-front fee.  Consequently, while you can get NTF funds at the discount brokers, you also need to decide if you would be better off paying a fee in order to put your money into a fund that has a better performance record.  Make sure you take the time to do your research.

Purchase an ETF

A few month's ago, I wrote a blog post about Warren Buffet's advice for retirees.  It was based on a speech he gave at one of the annual meetings for Berkshire-Hathaway.  In his speech, Warren Buffet recommended that most retirees would do best at handling their investment savings if they simply purchased ETFs (Exchange Traded Funds) in a variety of industries over a ten year period.  In this way investors would take advantage of dollar cost averaging and they would also be diversified over a number of different industries.

In a recent Money Magazine article titled "The One Retirement Move You Must Get Right," the authors also suggested that do-it-yourself investors should consider purchasing ETF's.  It's a good investment strategy that doesn't require you to pick individual stocks and cross your fingers that you have chosen winners.  So, both Warren Buffet and Money Magazine concur ... go with ETF's.

Set Up an Automatic Monthly Investment Account

Another approach to handling your own investments is to set up an automatic monthly investment account.  Some discount brokers offer their clients the opportunity to invest monthly in funds for free or for just a few dollars a month.  It is a great way to invest and spread the expense out over a long period of time.

Pay a Fee to Get the Fund You Want

Another option is to select the highest performing fund that interests you and pay the fees, which can range from $17 at Scottrade, $50 at Ameritrade or $76 at Schwab.  These fees can be well worth it to you if you are going to get a higher rate of return or save on annual expenses.

As I mentioned before, you will have to do the research to see which investment options are the most affordable and practical for you, while offering you the best rate of return.  Ask the different brokerage firms to send you information on all the funds and ETF's that you are considering.  Read all the information thoroughly.  Once you feel confident, form a plan and move forward with your choices in an organized, consistent manner.

You may also want to read these recent articles:

Should You Rollover Your 401(k) into an IRA?
How to Choose a Good Investment Adviser
How to Choose an Annuity for Retirement Income

Source:

"The One Retirement Move You Must Get Right," Money Magazine, July 2014, page 44

If you are planning to retire soon, use the tabs at the top of this page.  They contain links to hundreds of articles about where to retire, financial planning, medical issues, and family relationships.

You are reading from the blog:  http://www.baby-boomer-retirement.com

Photo credit:  www.morguefile.com

How to Choose an Annuity for Retirement Income

How can you guarantee that you will not run out of your retirement savings before you die?  One idea that is recommended by many financial advisers is to put a portion of your savings into an annuity.  Doing this can insure that you will always have at least some reliable income in addition to your Social Security benefits.  While not everyone will want an annuity because their assets are permanently tied up, others appreciate the secure income flow that annuities can create with a higher return than you would receive from bank interest.

In a "Money" magazine article, "The One Retirement Move You Must Get Right," the author discusses how to transition from saving for retirement to receiving a lifetime income from your savings.  As part of this article, the author demonstrates how you can lock-in a lifetime income with an annuity.  While they do not recommend doing this with all the proceeds of your 401(k) or IRA, they do see it as one part of a well-designed investment plan.  Which type of annuity is right for you ... a variable annuity or an immediate annuity?

Variable Annuities

Investment advisers who work for insurance companies are likely to advise you to purchase a variable annuity.  These investment products combine an income with the potential for your investments to continue to grow.  Approximately 75% of the annuities that are sold in the United States are variable annuities, primarily because the potential for asset growth sounds so appealing.

The downside of variable annuities is that the guaranteed income is lower and you may pay an extra 2% or more (6% vs. 4%) in up-front commissions as well as management fees of 2% or more per year of assets under management.  If you still decide that this is the best type of annuity for you, try to find one that only charges 1.5% a year for the assets under management.  If you pay 2.5% or more, you are unlikely to have enough asset appreciation to make the lower earnings worthwhile.

Fixed or Immediate Annuities

"Money" magazine suggests that most people will do better with a simple fixed or immediate annuity.  With this type of annuity, you pay a lump sum up front and receive a guaranteed lifetime income.   One advantage is that the commissions are usually 4% or less, compared with 6% for a variable annuity.  In addition, you do not pay the 2% annual management fee.  You can compare the commissions and estimated earnings for various fixed annuities at a website called immediate-annuities.com.

Rather than relying on the potential of appreciation in a variable annuity, with a fixed annuity you can put a portion of your retirement savings into the annuity and then invest the remainder of your savings in a low-cost mutual fund or exchange traded fund.  Research has shown that people tend to do better with this combination than they do when they put everything into a variable annuity.

Whichever type of annuity you choose, you will not want to rely solely on annuities for all of your retirement planning.  The more diverse your portfolio and the types of retirement tools you are using, the fewer problems you will have during a stock market decline, such as the one that began in 2007.

You may also want to read these other posts that were based on the Money magazine article:

Should You Rollover Your 401(k) Into an IRA?
How to Choose a Good Investment Adviser

Source:

"The One Retirement Move You Must Get Right," Money Magazine, July 2014, page 44.

If you are planning your retirement, you may want to use the tabs at the top of this page.  They contain links to hundreds of articles about financial planning, where to retire, medical issues and family relationships.

You are reading from the blog:  http://www.baby-boomer-retirement.com

Photo credit:  www.morguefile.com

How to Choose a Good Investment Adviser

In last week's blog post, I discussed "Should You Rollover Your 401(k) into an IRA?"  In making up your mind how to invest your 401(k) or IRA savings, many retirees will want to enlist the aid of a good investment adviser.  However,  with 300,000 financial advisers in the United States, how do you know if you are choosing someone reputable and who will give you the best advice?

In addition to getting the best investment advice, you also want to make sure you follow IRS tax guidelines so that you do not needlessly pay taxes on the proceeds.

Some advisers will push you to make decisions that are in their best interest, not necessarily yours.  For example, they may push you out of a 401(k) with a Fortune 500 company into an IRA, simply because they can charge you higher fees once your money is in an IRA.  While there are times when you may be better off in an IRA, you do not want to make the change simply because your adviser wants to earn higher fees.

How Can You Choose the Best Investment Adviser for You?

*  Ask the adviser you are interviewing a lot of questions.  For example, if they want to switch your plan so they can invest your savings in certain types of stocks or bonds, ask why that can't be done in your current plan.  Make sure you get satisfactory answers to all your questions.  Go home and think about what they said. You may want to interview another adviser, as well, to see if they give you similar advice.

*  Find out how the adviser is paid.  If he works for a brokerage firm, bank or insurance agency, it is likely that he is being paid primarily from commissions on the products that he sells you.  If he is a registered investment adviser, he is likely to be paid an annual percentage of the assets under management.  Some advisers charge a one-time up-front fee in the range of $800 to $1500 and, in return, they do not get commissions on products and they do not receive an annual fee on your assets that are under their management.  Some advisers are paid in several different ways.  You want to make sure you fully understand how the adviser you choose will be paid.

*  Try to determine the biases of the the investment manager you are considering.  Are they trying to steer you towards certain products because the commissions are larger for them?  Are they trying to switch you out of a perfectly good 401(k) into an IRA because they can then charge an annual fee for managing your assets?  Are they opposed to certain types of financial vehicles, like annuities or exchange traded funds, even though you are interested in including them in your portfolio?  Is their comfort level with risk similar to your own?

*  Make sure you understand what commissions you will be charged, up-front and in the future.  How do the fees and commissions compare to the return that you can expect on your money?  There is no point in paying a money manager so much that you barely get any return on your assets.

*  Ask the adviser about all the services they provide.  There could be a benefit to choosing an adviser who can help you with tax and estate planning, for example.  You also need to talk to them about the types of investments they prefer and make sure that their style is compatible with yours.  Are they more or less aggressive than you are?  You should also ask for their Form ADV Part II Brochure which will describe their services, fees and investment strategies.

*  Finally, but perhaps most importantly, DO A BACKGROUND CHECK. Countless people have been cheated by advisers who have a checkered past.  The first thing you should do is enter their name into FINRA Broker-Check at finra.org.  This will give you information on any "disclosure events" such as disputes with customers and, more seriously, felony convictions.  You may also want to do a Google search on their name to see if there are any other red-flags that you will want to know about.  If they are a principal in a small firm, do a Better Business Bureau check and a Google check on the name of the firm to make certain that people have been satisfied with the services they provide.  You literally cannot be too careful.

While following this advice will not guarantee that you are getting the best advice possible, it will help lesson the chances that you will run into problems.

Sources:

"The One Retirement Move You Must Get Right," Money Magazine, July 2014, page 44.

You may also want to read:

"Should You Rollover Your 401(k) into an IRA?

If you are planning to retire soon, you will also want to check out the tabs at the top of this article.  They contain links to hundreds of additional articles on financial planning, where to retire, medical concerns and family relationships.

You are reading from the blog:  http://www.baby-boomer-retirement.com

Photo credit: www.morguefile.com