Once again, the Social Security and Medicare Boards of Trustees have released their annual report on the fiscal health of the Social Security and Medicare programs, and once again the Trustees report shows that the fiscal health of the two programs has further deteriorated, a combination of primarily slower-than-projected growth, upwards adjustments to long-term costs (Medicare), and increases in estimated longevity (Social Security). With the latest projections, the Social Security trust fund is projected to be exhausted in 2036 (last year it was anticipated to last until 2037), and the Medicare trust fund will be depleted in 2024 (compared to last year's estimate of 2029). But while it's true that the systems are both headed for serious trouble as the trust funds potentially go "bankrupt" - the reality is that the actual depletion of the trust funds may still have a far less severe financial planning impact than many assume, for one simple reason: the overwhelming majority of Social Security and Medicare benefits will actually still be funded, via our ongoing Social Security and Medicare tax system!Read More...
The concept of safe withdrawal rates has been around for almost 20 years now, since it was first kicked off in the Journal of Financial Planning by Bill Bengen in 1994. Over the years, a number of developments have come along that has further elaborated upon and enhanced the body of research above and beyond its original roots. Nonetheless, despite significant advances in the theory and methodologies used to apply safe withdrawal rates in practice, one significant misconception remains, for some inexplicable reason: the idea that safe withdrawal rates are a pure auto-pilot program forcing clients to spend little from their portfolios, even in bull markets, such that the client is expected in any reasonable market environment to pass away leaving an enormous inheritance after a life of 'excessive' frugality. This misconception needs to end; it's not what the financial planning process is about, it's not what the research says, and it's not what is done in practice anyway!Read More...
It has been popular in recent years to bash volatility, and standard deviation as its most common way of being quantified, as a terrible measure of risk. Not just because of the criticisms associated with standard deviation itself and whether market returns are normally distributed, but at a more basic level: is the up-and-down volatility of an investment what a client really cares about? Shouldn't risk be more focused on loss, the impact of losses on goals, and the probability of achieving goals, than just the raw choppy volatility itself? Yes, perhaps, but on the other hand maybe we don't give volatility itself enough credit for the risk that it does create: volatility in investment returns leads to volatility and uncertainty about the timing of retirement and other goals and the risk that they cannot be achieved in the time anticipated.
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For many years, the use of annuities for retirement income guarantees often fell along all-or-none lines - either you annuitized the entire amount of income the client needed, or you didn't. In more recent years, this view has shifted, whether it means just annuitizing a portion of the client's assets to satisfy some of the income needs, or using a variable annuity with income/withdrawal guarantees to insure at least a portion of the income goals.
Although these strategies are viewed by many as a more balanced and "diversified" way to distribute income needs amongst various products and risks - for instance, insuring 50% of the income goal and investing towards the other 50% - it begs a fundamental question: what exactly does it mean to insure half of a client's retirement income goal?Read More...
The proverbial writing has been on the wall for a while, but now it's official: the Social Security withdraw-and-reapply strategy will no longer be available, except under relatively limited circumstances. On the plus side, though, it appears that the strategy has been far more hype than actual value, and the number of people directly affected should be very minimal.
One of the often-professed virtues of financial planning is that while we cannot necessarily completely prevent market declines from impacting client portfolios, at least when they do happen, “we have a plan.” Yet for too many financial planners, the reality is that the “plan” is nothing more than “we’ll keep doing exactly what we have been doing, and wait and hope for things to get better.” Well, if your only plan for dealing with a market decline is waiting it out in the hopes that things will recover in a timely manner, you don’t really have a plan; you just have a hope. A real plan takes more.
As Monte Carlo analysis becomes increasingly popular in retirement plans, financial planners are talking more and more about the probabilities of a client's success or failure. Yet in the end, most planners evaluate client goals, look at the probability of success (defined usually as not running out of money), and the client makes a decision about whether they like the result or not. Oddly enough, planners rarely take the next logical step: ask the client what probabilities they would like to see, and use that risk/success metric to determine what the other answers - such as retirement spending or the retirement year - could be.
If there's one thing that has remained certain in this decade of difficulty, it's the gold standard advice for retirement planning: save a healthy amount of your income, start young, invest steadily, and you'll be able to retire when you want to and enjoy the standard of living you hoped and dreamed for.
Yet the reality is that this model of retirement planning advice excellence is actually far more speculative than we have ever acknowledged, and might be better summed up as: "Save for decades, build a base, and then in the last few years, quickly double up your wealth with investment growth and retire happily." We'd never say that to our clients... yet in truth, that's exactly what we have been recommending all along!
In recent years, a little-known strategy of withdrawing from and reapplying for Social Security retirement benefits has been receiving increasing attention. So much, in fact, that it looks like the Federal government's Office of Management and Budget may soon be shutting the strategy down for good. However, the impact may not actually be very significant after all!
In a world where retirement planning is increasingly about not only the accumulation phase towards retirement, but the distribution phase in retirement, financial planners must deal with the practical realities of generating retirement cash flows for clients. And although most of us may have some policies in our practices about how we generate cash flows for clients, do any of us actually have a written withdrawal policy statement in place to determine the appropriate tactics and strategies for each particular client?
