Retirement security is a holy grail that many investors chase. A recent AARP survey revealed that 74 percent of private sector workers are anxious about having enough money to live comfortably in retirement.
Although increasing savings may seem like the answer, creating a sustainable retirement strategy is a bit more complex. Investors must also plan for costs that can detract from their portfolio's growth. "Taxes, long-term care and inflation all have the potential to eat away at your retirement savings," says Marcy Keckler, vice president of financial advice strategy at Ameriprise Financial in the greater Minneapolis-St. Paul area. "Not planning properly could result in a substantial blow to your portfolio from a sudden need for extended care, or inflation could slowly chip away at your nest egg."
Health care may be the biggest threat. Long-term care poses two problems for retirees. First, the cost can be staggering. Genworth Financial puts the average annual cost of nursing care in a semi-private room at $85,775. Assuming a typical two-and-a-half-year stay, the total bill for end-of-life care easily surpasses $200,000. The second issue is that these expenses don't fall under the Medicare coverage umbrella. Medicaid will pay for long-term care but requires seniors to spend down their assets to qualify.
Long-term care has the potential to be the most devastating to an investor's retirement strategy, says Steven Yager, a financial advisor with Yager & Associates in Northville, Michigan. The root problem is longevity. "People often assume that since their parents or grandparents lived to a certain age, they'll live to a similar age. They then base their retirement plan on this uneducated assumption about their own life expectancy."
Health care can encroach on your retirement security when expectations don't match reality. There are two possible solutions: Self-fund these expenses or invest in long-term care insurance. Self-funding may require you to increase your current savings rate or rethink your overall strategy. For example, you may need to maintain a larger share of stocks to generate growth in your investments for a longer period if you're trying to fill a long-term care funding gap.
Long-term care insurance can cover health care costs while leaving your portfolio intact, but because of their high premiums, these policies may suit some investors better than others. "It comes down to your asset base," says Jason Laux, vice president of Synergy Group in White Oak, Pennsylvania. "For people without a lot of assets, long-term care insurance usually isn't appropriate. For those who are wealthy, it may make more sense to be growing and investing your money."
Investors in the middle, with assets ranging from $350,000 to $1 million, could benefit most from a long-term care policy. Although these investors may not have enough wealth to self-fund, they can afford the higher premiums to avoid the Medicaid spend-down requirement.
Protection from higher prices comes at a cost. Inflation can be detrimental to retirement savings. Research from insurance consultancy LIMRA suggests that a retirement portfolio could lose more than $73,000 in purchasing power from a 2 percent inflation rate. The effects of inflation may be compounded when increases in certain expenses – such as health care – outpace rising prices in general.
Including inflation-hedging investments in your retirement plan offers a measure of protection for your portfolio. Annuities and Treasury inflation-protected securities are two options for taming inflation's effects.
Annuities are designed to provide tax-deferred growth and generate a guaranteed stream of income, which can supplement income from tax-advantaged retirement accounts, taxable investments or Social Security benefits. With TIPS, the principal value of the investment adjusts up or down in tandem with changes in the consumer price index. These investments yield lower returns compared to stocks, but they can be useful by shielding investors against the negative effects of inflation.
While both annuities and TIPS can benefit investors in retirement, there are some downsides to consider, says Joy Kenefick, managing director of investments with Wells Fargo Advisors in Charlotte, North Carolina. Annuities can offer guaranteed income or guaranteed protection in volatile or declining markets, but the expenses, complexity and lack of liquidity may make them a less than perfect fit for your investment needs.
TIPs, by comparison, offer modest returns in exchange for protection against market volatility and inflation. The benefit they offer comes at the cost of performance and growth, Kenefick says. Before buying into either one, assess the value and purpose of these investments for your retirement strategy.
Diversification should address this overlooked risk. Many investors diversify their assets for risk but not for taxes, Laux says. "They funnel the majority of their investments into pre-tax accounts and are told they'll be in a lower tax bracket when they retire but often don't find that to be true." Without tax diversification, he says, you could end up paying the maximum taxes on all your retirement assets.
Creating tax diversification begins with knowing what you've invested in and where those investments are held. Tax-inefficient investments, such as bonds, belong in tax-deferred accounts, while tax-efficient vehicles, like stock index funds, should be held in taxable accounts. Growth stocks can be used in a 401(k) or similar account to capitalize on the compounding benefit of tax deferral, says Melinda Kibler, a certified financial planner with Palisades Hudson Financial Group in Fort Lauderdale, Florida.
Minimizing the tax bite on your investments becomes even more important when you begin withdrawing money from those accounts. "The way in which an investor harvests from their portfolio is more consequential than the way one saves," Kenefick says. Investors should tap non-qualified accounts first, she says, leaving tax-sheltered accounts to compound and avoid "the eroding effects of paying taxes for as long as possible."
Calculating your target withdrawal rate accurately also matters. Daniel Prince, head of product consulting for BlackRock's iShares U.S. wealth advisory business, says an optimal withdrawal strategy requires retirees to be accurate on both sides of the ledger. Retirees should be realistic about their income and assets, and balance that against their spending. "Taxes will always be a cost," Prince says, but between long-term care and inflation, it's the easiest of the three to proactively reduce.
A friend recently asked if I would invest $10,000 for him. I shrugged it off but he proceeded to tell me that he needed to make a quick buck to pay for some medical expenses he was about to incur...
Many people view the stock market as a "get rich quick scheme" -- you just need to know how to play the game.
This wasn't the first time I've been asked by someone to invest their money to make some fast cash. I know it won't be the last, either.
In these sorts of situations, I try to tamper their expectations by letting them know that it's really not that simple (or easy). I tell them that even if I were to generate a "quick" 10% annual return on their investment, it doesn't really add up to much in the short term. After all, a 10% return on $10,000 is only $1,000... And that's over the course of 12 months. It's most definitely not going to be enough to cover any major medical bills.
Unfortunately, stories like this are common. The thinking is that we can invest small sums of money and turn ourselves into "overnight" millionaires. But this couldn't be further from the truth.
As much as I would like to help these folks invest and learn about the market, it's hard to overcome these kinds of expectations. Investing can be a frustrating endeavor, but it also can be rewarding. I do believe that the stock market is one of the greatest tools we have at our disposal to build our wealth... over time.
But in order for it to be less frustrating, less stressful and more enjoyable we need to keep our expectations and perspectives in check. And, of course, we need to keep it simple. Investing doesn't have to be complicated, nor should it.
It's when we expect to turn a $1,000 or $10,000 investment into hundreds of thousands of dollars overnight that investing can become unhealthy. When those are the expectations, that's when you begin to try complicated strategies, or you put all your eggs in one basket on that one stock, hoping that it will be the stock the allows you to retire early. That's also when stress levels and sleepless nights become routine.
That's no way to build wealth or live life.
Instead, it's best to keep those expectations in check and keep investing simple. Keeping it simple is how investing legend Warren Buffett became one of the world's richest men.
Buffett didn't get caught up in the whirlwind of investing in internet stocks during the dot-com bubble in the late 1990s. Yes, he was chided for "missing out" on these hot stocks. But he didn't understand them, so he stayed away. Instead, he kept his focus on buying some of the best businesses in the world. He stuck to what he knew and he kept his investing simple: buy great businesses at fair prices and let them reward you over the long term.
Buffett's investing script is straightforward: buy companies that dominate their industries, sell their products around the globe, have high operating margins and strong balance sheets, and generate massive returns for shareholders. These are companies that have likely been around for decades and won't be going away anytime soon.
The funny thing is that Buffett's investing strategy is easy to understand. He even provides a blueprint of what he looks for in companies in his annual letters to shareholders. Yet, few investors have the patience to invest in these great businesses. They're usually too "boring." Instead, investors look for that next hot stock pick and expect it to immediately shower them with the sort of wealth that Buffett has accumulated over the last 50-plus years.
As I've said time and time again in my Top Stock Advisor premium newsletter... we want to buy wonderful businesses at fair prices. This is a time-tested strategy, with Warren Buffett is living proof that it works.
Investing takes patience. Keep your expectations and perspective in check, and remain focused on buying the best companies on the planet. And, of course, remember to keep it simple.
While you're at it, I strongly advise you check out my latest report: The Top 10 Stocks for 2018. We're convinced -- based on our cumulative decades of experience and expertise -- that these stocks are your best bet for building wealth in 2018 and beyond.
Why? Because we keep it simple, only recommending companies with huge long-term advantages over the competition, that make products and services their customers can't live without, and that reward shareholders with growing dividends and massive buyb
To make your retirement years truly golden, understand what may be coming your way.
Many of us look forward to retirement as the reward for a lifetime of hard work. While the post-work years can truly be golden for those who plan for them, many retirees are caught off guard by the facts of their new life. Here are six things you should know about before you leave the working world for good.
1. Required minimum distributions can seriously raise your costs
Once you reach age 70 1/2, you're typically required to take money out of your traditional IRA and your traditional 401(k) plan each year. While those distributions start relatively small, they increase as a percentage of your account balance each year after that until you reach age 115.
Withdrawals from these account types are treated as taxable income, which means you'll owe income tax on the amount distributed. This increase in your taxable income may expose your Social Security benefits to taxation as well. As if that weren't enough, your Medicare Part B premium also rises along with your income. If your income is high enough, Part B can cost you as much as $428.60 per month.
Those are some tremendous costs to bear for accessing your own retirement savings.
2. Medicare premiums can eat up your Social Security increase
Most retirees are relieved to find out that their Social Security benefit can receive an inflation adjustment every year to help keep pace with rising costs. What few realize, however, is that raising Medicare Part B premiums may wind up chewing through most, if not all, of that entire increase. Thanks to the "hold harmless" provision, hikes in Medicare Part B premiums can eat up all -- but not more than -- the increase in a recipient's Social Security check.
The table below shows how that has worked in recent years. Standard Medicare Part B premiums increased from $104.90 per month in 2015 to as much as $134 per month in 2017. They're expected to remain at $134 in 2018, but that's cold comfort to a retiree whose net monthly Social Security check has gone up by less than $8 since 2015 because of Medicare Part B premium hikes.
3. It gets substantially harder to wait out a bad market once you retire
While you're working and adding money to your retirement accounts, your salary covers your costs of living. That makes it much easier for you to power through a nasty bear market and wait for the ensuing recovery. Indeed, in many respects, while you're still working, you can look forward to bear markets as an opportunity to buy great companies' stocks on sale.
Once you retire and start pulling money from your portfolio to cover your costs of living, however, a down market takes on an entirely different meaning. If you need to sell stocks to pay your bills, a market slump may leave you with no choice but to sell at a low point and rapidly deplete your retirement assets. That's why you should structure your retirement finances so that you have at least a five-year buffer of bonds and cash to see you through bad spells. Then you won't be forced to sell during a typical downturn.
4. You could finish retirement with a larger nest egg than you had when you started it
A common guideline for retirement spending is known as the 4% rule. This rule indicates that with a diversified stock and bond portfolio, you can spend 4% of the initial value of your nest egg in the first year of your retirement and then increase your withdrawals annually based on inflation. Following that strategy, over the course of a 30-year retirement, you'll be very unlikely to run out of money.
The benefit of following the 4% rule is that it has been back-tested and shown to survive some pretty tough market conditions. The potential downside, however, is that because the rule was designed to withstand tough market conditions, you may end retirement with more money than you had when you started it -- especially if you're invested primarily in stocks, which have far outpaced inflation over the long term.
Michael Kitces of Pinnacle Advisory Group analyzed models of the 4% rule over various 30-year periods all the way back to the late 19th century, and he found that the median follower of the 4% rule would end up with about 2.8 times their starting balance at the end of those 30 years.
So what's wrong with ending retirement with more than you started with? Well, as the old saying goes, you can't take it with you. If that money is available to you at the end of your retirement, it means you didn't spend as much as you could have earlier in your retirement, when you may have been able to enjoy it more.
5. Other than health-related costs, your expenses may actually go down in retirement
Americans' annual household spending tends to decrease once a family is headed by a person aged 55 or older, according to the U.S. Bureau of Labor Statistics. That's partly because they have paid off their mortgages, and their adult children are self-sufficient. They also enjoy various tax benefits like a larger standard deduction, greater medical-expense deductions, and freedom from the Social Security and Medicare payroll tax.
There's also the fact that people generally slow down as they age. While early retirement may be marked by periods of frequent travel, older retirees tend to stay put more and thus spend less. Keep that in mind as you plan out your retirement, because you'll want to be able to spend more while you're young enough to enjoy that spending to the fullest.
6. You still have 24 hours in your day and seven days in your week
Depression is a widespread issue among retirees. When you leave the workplace, you lose the regular socialization that goes with it, along with the daily mental and physical activity. The deaths of aging friends and family members are also a contributing factor. The happiest retirees find meaningful ways to fill their days. Caring for family members, charitable volunteer work, or even a low-stress job can keep them active and provide them with purpose, stimulation, and social support.
Working late in life is not a sign of failure. Even Warren Buffett, one of the richest people in the world, chooses to keep working despite the fact that he's well into his 80s. His secret is doing work that he loves, finds meaning in, and can continue to do despite his age. While you may never be CEO of a multibillion-dollar business, you can certainly use him as inspiration to keep active and engaged well into your golden years.
At Irwin Consulting, we perform according to high standards and base our continued success on the quality of service we provide our clients. Although our technical expertise aids us in attaining much success, it can never replace the good people that make this great firm thrive. We are proud of each and every worker and client we deal with. We are committed to provide the highest quality of service to our clients, giving them superior investment benefits, attaining progress for the firm, its employees and clients, establishing standards, and being the Prime Choice of Investment Management.