June 29, 2019

Long Term Care Insurance: Options for buying

Check out this opinion piece about the benefits of buying LTCI as part of a package deal with life insurance or an annuity instead of buying straight insurance:
"THE INSURANCE market for long-term-care coverage has had a checkered history—and yet there’s an increasing need for LTC insurance among aging baby boomers. My advice: Forget the original standalone insurance products and instead focus on the new hybrid policies. What went wrong with the original standalone products? They proved to be underpriced." from Humble Dollar.
Get the details:

Tax breaks are great... except for the consequences

CBO warns of unprecedented federal debt
A Congressional Budget Office report estimates federal debt will increase from 78% of GDP this year to 92% in 2029 and 144% in 2049, which would mark the highest level ever. "The prospect of such high and rising debt poses substantial risks for the nation and presents policymakers with significant challenges," the report says.
We sure aren't doing out kids and grandkids any favors!    

June 25, 2019

Is 4% withdrawal rule for retirement still a reliable guideline?

The general guideline of withdrawing no more than 4% of your portfolio each year during retirement has come under fire as of late. This guideline was the result of a study conducted almost 30-years ago by William Bengen, at a time when it was believed that 5% was a safe withdrawal rate. In the study William determined that 5% was too risky, and proposed the change to 4%. 
Based on PAST historical returns, the 4% rule appears to be valid BUT prolonged periods of very low returns on bonds in recent years suggest that withdrawing 4% per year adjusted for inflation is no longer a safe guideline. 

Research by Michael Finke, Ph.D., CFP®
Wade D. Pfau, Ph.D., CFA
David M. Blanchett, CFA, CFP®
suggests that the rule is no longer a valid guide because of persistently low interest rates.

The 4% Rule is Not Safe in a Low-Yield World

Executive Summary:
"The safety of a 4% initial withdrawal strategy depends on asset return assumptions. Using historical averages to guide simulations for failure rates for retirees spending an inflation-adjusted 4% of retirement date assets over 30 years results in an estimated failure rate of about 6%. This modest projected failure rate rises sharply if real returns decline.
 As of January 2013, intermediate-term real interest rates are about 4% less than their historical average. Calibrating bond returns to the January 2013 real yields offered on 5-year TIPS, while maintaining the historical equity premium, causes the projected failure rate for retirement account withdrawals to jump to 57%. The 4% rule cannot be treated as a safe initial withdrawal rate in today’s low interest rate environment.
 Some planners may wish to assume that today’s low interest rates are an aberration and that higher real interest rates will return in the medium-term horizon. Although there is little evidence to support this assumption, we estimate how a reversion to historical real yields will impact failure rates.
Because of sequence of returns risk, portfolio withdrawals can cause the events in early retirement to have a disproportionate effect on the sustainability of an income strategy. We simulate failure rates if today's bond rates return to their historical average after either 5 or 10 years and find that failure rates are much higher (18% and 32%, respectively for a 50% stock allocation) than many retirees may be willing to accept.
The success of the 4% rule in the U.S. may be an historical anomaly, and clients may wish to consider their retirement income strategies more broadly than relying solely on systematic withdrawals from a volatile portfolio."

SO... what to do. No one ever really recommended that you rigidly follow the 4% guideline every year regardless of portfolio returns. Besides, our need for income fluctuates over a 25-30 year period. Duh! Thus, it is prudent to to make adjustments to balance out returns and needs over a retirement lifetime.
What is "sequence of returns risk"?? If you are lucky to retire during a decade of high investment returns, you may end up with more money than you started with at retirement. However, if the first 5-10 years of your retirement yield negative returns... you're in trouble. 

Another factor to consider is the benefit of investing a portion of your retirement into a lifetime annuity to ensure that, along with Social Security, you won't run out of money.

June 21, 2019

How to Save for Retirement If You Have Your Own Business

Some small-business owners are failing to plan for retirement or are making critical mistakes that could hurt their long-term wealth. This article offers planning tips and an overview of three kinds of retirement accounts: SEP IRAs, solo 401(k)s and traditional 401(k)s.

Married women more at risk in retirement than singles

Women in their 50s who are married have a higher retirement risk than those who are single, widowed or divorced, according to a study that uses information from the National Retirement Risk Index. Factors include married couples' lack of enough savings for two people in 401(k) plans and the way Social Security benefits are calculated, writes Alicia Munnell, director of the Center for Retirement Research at Boston College.

June 9, 2019

Finding an affordable college

The college selection process has become more complicated over the years due to the rising cost. Significant planning should be done before students apply if your goal is to an affordable institution. By estimating Expected Family Contribution (EFC) and net cost of college before your child applies, you can eliminate those schools that will put your student’s future in financial jeopardy.

Need-based or Merit Aid?

The vast majority of aid falls into the need-based and merit categories. Since need-based awards (on average) are larger than merit awards, the first step should be to see if they qualify for need-based aid, and that means calculating Expected Family Contribution (EFC).
Step 1: Calculate EFC
Calculating and minimizing EFC for both FAFSA and CSS Profile is a critical first step in the effort to save on the cost of college. My favorite calculator is the College Board’s calculator, because it calculates EFC under both methodologies.
Step 2: Compare EFC to COAs
Compare the EFC it to the Cost of Attendance (COA, which is tuition + room and board + books and fees + travel). You can find the COA and other data on Collegedata.com. You can utilize the College Match search engine there to filter schools by over 15 different criteria, including geography, major, four-year graduation rate and financial aid criteria.

Author: Robert J Falcon, CFP®, CPA/PFS, is the founder of College Funding Solutions LLC, and the founder of Falcon Wealth Managers LLC, both in Concordville, Pa.

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