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My friend Brian Portnoy came through to talk about his new book, The Geometry of Wealth, which I have on my summer reading list. It’s gotten rave reviews from friends of mine who’ve already read it. Brian is an expert on behavioral investing and has spoken with thousands of professional investors, allocators and advisors during the course of his career. This book, however, is a little different. It’s abo...
At a point in some people’s lives, they conclude they need some sort of assistance with their financial situation. This could be a recent high school or college grad determined to start off on the right track, or those in their mid to late working careers wondering if what they’re doing is the “right” way of doing things financially. In either case, the hope may be to make as few mistakes as possible along the way.
When considering this situation, there are a few things to look at first, before moving on to other planning areas. In other words, think of the follow as a good foundation to have before expanding on or continuing your wealth management plan.
This protects individuals so they do not have to leverage expenses on a credit card, home equity, or dig into precious retirement or college investments. As non-discretionary expenses increase, so should the emergency fund. However, non-discretionary expenses don’t have to increase arbitrarily. Be cognizant of whether an increase makes sense (e.g. higher rent, mortgage, car payment, etc.). Which leads to our next point.
Being over-leveraged makes or causes delays or shortages to retirement and college funding. It makes us susceptible to working just to pay current debts, instead of working to fund long-term goals.
Life insurance protect human capital (current and future wages) from pre-mature death, disability insurance does protect income if we can no longer work due to disability. Auto insurance protects us against liability from accidents and homeowners provides liability protection in addition to protecting (for many individuals) their largest asset. An umbrella policy (which everyone should have) provides additionally liability should limits be exceeded on underlying policies.
Health insurance covers illness so we do not become insolvent due to an illness, while long-term care insurance may be necessary to preserve wealth due to long-term care needs. Annuities (the other life insurance) may be necessary to protect against outliving one’s income.
While not exhaustive, these are the general areas to think about then first getting started, or continuing with your wealth management plan.
As always, feel free to reach out to use if we can help you along the way.
According to the U.S. Census Bureau, more than half of Americans have a retirement savings account—most frequently, a workplace savings plan like a 401(k). If you’re saving in one of these plans, you likely have an idea what you’re total account balance is, and probably what percent of your salary you’re saving. And even if you don’t, you can take a look at your most recent statement or on your plan’s website.
As important as these things are—your savings rate and account balance can’t tell you the two things that really matter about your retirement savings–namely, how much retirement income you’ll be able to withdraw from your 401(k) account each year, coupled with how long you might need the money.
BlackRock Defined Contribution Survey
In fact, the latest 2018 BlackRock DC Pulse Survey shows that 51% of employees with 401(k) plans reported that it is difficult to know how much retirement income their savings will translate into–and 48% say having to generate their own income worries them. Almost all of them (93%) said they would like guidance from their employer about how much monthly income they could expect from their savings.
And it doesn’t get any easier once you’re retired, either. Research recently published by BlackRock shows that while the vast majority of retirees haven’t been spending their retirement savings (leaving nest eggs mostly untouched and instead living on ready sources of income), future retirees will likely face increased pressure to spend down savings—principal and all—to support their desired retirement lifestyles.
Calculating retirement spending
What’s been missing for most people is a simple way to calculate the level of spending that can be generated from a given savings amount, that takes into account realistic assumptions about a retiree’s longevity as well as a forecast for market returns.
The new LifePath® Spending Tool does just that. By entering two simple inputs–age and amount saved–the tool not only provides spending estimates for the current year (starting at 63) but also estimates spending and account balances in subsequent years (up to age 95).
Since market conditions and longevity forecasts change over time, it’s a tool that can be re-visited each year. For example, the annual spending estimates for a 65-year-old and 70-year-old, each with $500,000, would be $21,427 and $23,802 respectively.* Understanding how to account for longevity may help us spend more efficiently and with more confidence.
Saving for retirement is hard enough. But for current and future retirees, knowing how to spend the money you’ve saved can mean a material difference to your quality of life and sense of financial security.
Of course, you may wish to discuss your options with a trusted financial advisor when planning for your future. The important thing is to take advantage of all the resources available to you so you can reduce the uncertainty around making your savings last.
*Click here for the methodology and assumptions used in the LifePath® Spending Tool (the “tool”). Projected annual spending amounts were generated 6/30/18 and are subject to change.Investing involves risks, including possible loss of principal. This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of July 2018 and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this post is at the sole discretion of the reader. ©2018 BlackRock, Inc. All rights reserved. BLACKROCK and LIFEPATH are registered trademarks of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners. 546268
Did Michael Batnick commit a chart crime this week? He did a tweet that absolutely exploded overnight, with lots of critics chiming in while simultaneously ADMITTING they didn’t bother to read the text – just jumping to a conclusion because of the visual. Michael explains in the post linked below, where you can see the chart itself: Pareto (The Irrelevant Investor) Today at The Compound, we talk it out and try...
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When we hired Alex Palumbo to be a financial advisor at the firm back in 2015, one of our conditions was that he begin the process of attaining the Certified Financial Planner (CFP) designation. He eagerly accepted the challenge for both the benefit of the clients he’d be serving as well as his own professional development. Alex took the final exam yesterday, after years of studying and passing various tests along t...
We get a lot of questions from investors in their twenties and early thirties who are first beginning the process of building a portfolio and investing. The price of rent and the ubiquity of large student loan balances have made this a bigger challenge for young people than previous generations have had to contend with, and yet they’re still managing to get it done now. We created Liftoff a few years ago as a way to...
It’s usually best, for most things in the financial world, to act now rather than waiting around. The notable exception is with regard to applying for Social Security benefits. This is not to say that it’s always (or ever) best to delay benefits – but there can be cases where delaying pays off in spades.
As you’ll see from the table below, if you’re in the group that was born after 1943 (that’s you, Boomers!) you can increase the amount of your Social Security benefit by 8% for every year that you delay receiving benefits after your Full Retirement Age (FRA – see this article for an explanation).
Delay Receipt of Benefits to Increase the Amount
If you are delaying your retirement beyond FRA, you’ll increase the amount of benefit that you are eligible to receive. Depending upon your year of birth, this amount will be between 7% and 8% per year that you delay receiving benefits – which can be an increase of as much as 32½% if you delay until age 70 and you were born in 1941 – when your FRA is 65 years and 8 months, and the increase amount is 7½% per year at that age. See the table below for the increase amounts per year based upon birth year:
So you can see the impact of delaying receipt of retirement benefits – it can amount to more than 50% of the PIA (Primary Insurance Amount), when you consider early benefits versus late benefits. Of course, by taking benefits later, you’re foregoing receipt of some monthly benefit payments; given this, early in the game you’d be ahead in terms of total benefit received. This tends to go away as the break-even point is reached in your early 80’s in most cases.
An Example of Delay
Here’s an example of the benefit of delay in action:
You were born in 1954, and as such your FRA is age 66. According to the benefit statement you’ve received from Social Security, you are eligible for a monthly benefit payment of $2,000 when you reach your FRA (which would be in 2020). If you delayed applying for your benefit until the next year, your monthly benefit payment would be $2,160 per month – an increase of $1,920 per year. If you delayed until age 68 (two years after FRA), the monthly payment would be increased to $2,320, for an annual increase of $3,840. At age 69, delaying would increase your annual benefit by $5,760, and at age 70, your monthly payment would be $2,640, for an annual benefit of $31,680 – $7,680 more than at FRA. This amounts to a 32% increase in your benefit by delaying receipt of the benefit by 4 years!
It’s important to note that this is not a compounding increase – that is, your potentially-increased benefit from one year is not multiplied by the increase for the following year. The factor for each year (or portion of a year) is simply added to the factor(s) from prior years. You also don’t have to wait a full year to achieve the benefit – this delay is calculated on a monthly basis, so if you delayed by 6 months your increase would be 4% over the FRA amount.
The biggest benefit of this is that you can not only increase the amount you will receive over your lifetime, but also the survivor benefit that your spouse will receive upon your passing. For some folks this can make a huge difference as they plan for the inevitable.
As I mentioned above – this article is only meant to encourage you to consider the impact of delaying on your future benefits. It is not to be construed as a blanket recommendation to delay benefits. Early benefit filing may be the best option in your case – and all of the benefit amounts are designed to pay you approximately the same benefit over your lifetime if you live to the actuarial average, to your early 80’s.
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