Dave can count on a traditional pension, paying $4,000 a month for the rest of his life. Ron, on the other hand, will receive his benefits in a lump sum that he must manage himself. Ron has a lot of choices, but all have consequences. For example, he could put the money into a conservative bond portfolio and by spending the interest and drawing down the principal he could also spend $4,000 a month. If Ron does that, though, he can expect to run out of money sometime around the age of 85, which the actuarial tables tell him he has a 30 percent chance of reaching. Or he could draw down only $3,000 a month. He wouldn’t have as much to live on each month, but his money should last until he reached 100.

Who is likely to be happier right now? Dave or Ron?

If this question seems a no-brainer, welcome to the club. Nearly everyone seems to prefer the certainty of Dave’s pension to Ron’s complex options.

But here’s the rub: Although people like Dave who have them tend to love them, old-fashioned “defined benefit” pensions are a vanishing breed. On the other hand, people like Ron — with defined-contribution plans like 401(k)s — can transform their uncertainty into a guaranteed monthly income stream that mirrors the payouts of a traditional pension plan. They can do so by buying an annuity — but when offered the chance, nearly everyone declines.

Economists call this the “annuity puzzle.” Using standard assumptions, economists have shown that buyers of annuities are assured more annual income for the rest of their lives, compared with people who self-manage their portfolios. One reason is that those who buy annuities and die early end up subsidizing those who die later.

So, why don’t more people buy annuities with their 401(k) dollars?

Here’s one part of the answer: Some people think that buying an annuity is in some way a bad deal for their heirs. But that need not be true. First of all, a retiree can decide to set aside some portion of a retirement nest egg for bequests, either immediately or at a later date. Second, if a retiree chooses to manage his or her own money, the heirs may face the following possibilities: Either they get financially “lucky” and the parent dies young, leaving a bequest, or they are financially “unlucky,” meaning that the parent lives a long life, and the heirs take on the burden of support. If you have aging parents, you might ask yourself how much you’d be willing to pay to insure that you will never have to figure out how to explain to your spouse, or whomever you may be living with, that your mother is moving in.

There are other explanations for the unpopularity of annuities, but I think two are especially important. The first is that buying one can be scary and complicated. Workers have become accustomed to having their employers narrow their set of choices to a manageable few, whether in their 401(k) plans or in their choice of health and life insurance providers. By contrast, very few 401(k)’s offer a specific annuity option that has been blessed by the company’s human resources department. Shopping for an annuity with hundreds of thousands of dollars at stake can be daunting, even for an economist.

The second problem is more psychological. Rather than viewing an annuity as providing insurance in the event that one lives past 85 or 90, most people seem to consider buying an annuity as a gamble, in which one has to live a certain number of years just to break even. But, as the example of Dave and Ron shows, it’s is the decision to self-manage your retirement wealth that is the risky one.

The most complex and unknowable part of that risk is in predicting how long you will live. Even if there are no medical advances in the coming years, according to the Social Security Administration, a man turning 65 now has almost a 20 percent chance of living to 90, and a woman at this age has nearly a one-third chance. This means that a husband who retires when his wife is 65 ought to include in his plans a one-third chance that his wife will live for 25 more years. (A “joint and survivor” annuity that pays until both members of a couple die is the only way I know for those who are not wealthy to confidently solve this problem.)

An annuity can also help people with another important decision: when to retire. It’s hard to have any idea of how much money is enough to finance an appropriate lifestyle in retirement. But if a lump sum is translated into a monthly income, it’s much easier to determine whether you have enough put away to afford to stop working. If you decide, for example, that you can get by on 70 percent of preretirement income, you can just keep working until you have accrued that level of benefits.

IN the absence of annuities, there is reason to worry that many workers are having trouble with this decision. Over the last 60 years, the Bureau of Labor Statistics reports that the average age at which Americans retire has trended downward by more than five years, from 66.9 to 61.6. Of course, there is nothing wrong with choosing to retire a bit earlier, but over the same period, live expectancy has risen by four years and will likely continue to climb, meaning that retirees have to fund at least an additional nine years of retirement. Those who manage their own retirement assets can only hope that they have saved enough.

Annuities may make some of these issues easier to solve, but few Americans actually choose to buy them. Whether the cause is a possibly rational fear of the viability of insurance companies, or misconceptions about whether annuities increase rather than decrease risk, the market hasn’t figured out how to sell these products successfully. Might there be a role for government? Tune in next time for some thoughts on that question.

Richard H. Thaler is a professor of economics and behavioral science at the Booth School of Business at the University of Chicago. He is also an academic adviser to the Allianz Global Investors Center for Behavioral Finance, a part of Allianz, which sells financial products including annuities. The company was not consulted for this column.

If your Variable Annuity fees are 3% and the gross return for a year is 12%, you will net an increase account value of 9%. However, if the gross return for a year is NEGATIVE 12% for that same account, you will net a decrease in account value of 15%. Should this happen to you back-to-back, one year to the next, you will lose money even though the market remained flat during that 2-year period.

Now, allow me to further educate you with the two very important reasons stated above as to why retirees should AVOID Variable Annuities and why I don’t even allow my firm to sell them!

Reason #1: Variable Annuities are subject to stock market losses. Any vehicle that is subject to stock market losses is a dangerous pursuit for a retiree. If your goal is growth along with preservation, there are reliable (in fact, guaranteed income) vehicles available to achieve this goal. Variable Annuities simply risk too much.
 
Reason #2: Non stop annual fees of 3%, 4%, or more. With fees like these, it takes much bigger gains to bring an account back to its previous level after losses are sustained. That means that a simple 5% loss in the market combined with 3 or 4% fees requires that a market gain of 13% must occur in order to right your ship. Again, it is simply much too risky.

Do you want financial growth and preservation while avoiding damaging losses? I urge you to contact one of our Annuity experts before you invest in a Variable Annuity. They’ll be able to answer your questions in simple terms and help you choose a vehicle that is tailored to match your retirement income goals. A consultation with one of the hand-selected Annuity Experts that I personally trained is completely free and may be the smartest financial decision you ever make for you and your family. Call 619-291-1233 ext 107

Dedicated To Increasing Your Retirement Income,

 The professionals at LMT Financial

There are two big reasons retirees should avoid Variable Annuities, (we don’t let our firm sell or recommend them ever!)

Reason #1: Variable Annuities are subject to stock market losses. Any vehicle that’s subject to stock market losses is a dangerous pursuit for a retiree. If your goal is …growth along with preservation there are reliable (in fact, guaranteed income) vehicles available to achieve this goal. Variable Annuities simply risk too much.

Reason #2: Non stop annual fees of 3%, 4%, or more. With fees like these, it takes much bigger gains to bring an account back to it’s previous level after losses are sustained. That means that a simple 5% loss in the market combined with 3 or 4% fees requires that a market gain of 13% must occur in order to right your ship. Again, it’s simply much too risky.

If your variable annuities fees are 3% and the gross return for a year is 12%, you’ll net an increase in account value of 9%. But if the gross return for a year is NEGATIVE 12% for that same account, you’ll net a decrease in account value of 15%. Should you have that scenario play out back to back one year to the next, you will lose money even though the market stayed flat in the overall 2-year period.

Since most retirees are looking at long term ranges, it’s not my goal to warn you about short term losses. But this point illustrates that it takes HUGE gains to recover from losses with a Variable Annuity than most people think. Think Safety and protect your principal from any losses as you head down the retirement path!

Then call our office today to schedule a time to talk with one of our Annuity Experts. There is no cost and no obligation for this service.

Warmest Personal Regards,

Lance

First, they suggest that retirees determine the minimal acceptable level of retirement income. This will vary from person to person. Then, they suggest investing as much of your life savings as necessary in an annuity to cover this minimal amount. That way, you won’t have to spend more to cover your needs and you won’t have to depend on government programs that could lessen or disappear.

Next, they suggest annuitizing some of your remaining money, and putting the rest in a combination of money market funds, stocks, and fixed income securities. They caution retirees in this process to make sure that they have provided for any other expenses, like health care or a nursing home. There are types of insurance that will do this, or the retiree can purchase a rider to a lifetime annuity that makes provision for it.

Most retirees want to leave a significant sum to their heirs. However, they need to balance this with having a comfortable retirement of their own and not leaving their heirs with unpaid medical debt. The higher your tolerance for risk, the more of your life savings you can invest in stocks and other high-risk investments in order to try to accumulate wealth for your heirs.

Finally, the authors caution retirees to make sure that they purchase annuities only from insurance companies that are financially sound. This will allow them to relax and not have to worry about their money during retirement.

If any of this information sounds confusing to you, or you’d like help in purchasing the types of investments that Babbel and Merrill suggest, we can help.

Over the last 7 years, our team of Annuity Experts have researched and reviewed over 1,500+ annuities from many of the top-rated and highly-respected insurance company. And out of all the various different annuities we have reviewed… only 14 passed our extensive tests and meet our strict standards.

If you would like to get a free quote for your own financial portfolio with some annuities that have passed our tests and would be recommended for retirees and pre-retirees…

Then call our office today to schedule a time to talk with one of our Annuity Experts. There is no cost and no obligation for this service.

Warmest Personal Regards,

Lance

Though Babbel and Merrill stress the benefits of annuities, they do not sell them. This means that their research avoids bias. In addition, the Wharton Institute is a prestigious research location, so you can depend on their work. Babbel and Merrill not only like annuities because of the insurance factor mentioned above, but because they let people continue to spend as they always have, for the rest of their life.

An annuity is the only investment vehicle that allows this. They aren’t one choice among many, but one that stands alone.

Many retirees fear that, with annuities, like with so many other investments, the fees they would pay outweigh the benefits. Babbel and Merrill address this question, too. They note that you cannot produce the benefits of an annuity and the protection over a lifetime without spending 25%-40% more money, since you’d need to single-handedly set aside enough to last the rest of your life.

They also note that, even if you did set aside this additional money, you wouldn’t be guaranteed a lifetime income. Interest rates can change, and inflation can rise. Thus, choosing an annuity, even one with fees, can save you this 25%-40%.

This paper, published on August 14, 2007, called the current financial situation a “perfect storm” for retirees looking to invest their life savings and not outlive it. A perfect storm is the worst type of storm to be caught in.

They see several forces converging on those who are retired or who are near retirement. These forces are decreased levels of Social Security, an older baby boom generation, emerging post boomers, the increased American lifespan, and the decreased availability of pensions with definite benefits.

No one can stop any of these changes, whether demographic or economic, from occurring. All retirees can do, then, is work as hard as they can to plan well for retirement so their money lasts in spite of these factors.

The purpose of this weeks blog is to educate you on what has happened and what is happening now with corporate and government pensions.  All of the information contained here is completely factual.  Unfortunately, many retirees have suffered losses and have had to reduce their standards of living in retirement because they were not fully informed of these important changes that are now taking place.  Through education, we hope to be able to assist you in avoiding any such losses.  Some long-term employees and executives of the big companies mentioned above, and of many other companies, have seen their pension income significantly reduced.  In some cases, they are receiving only 10 cents or 20 cents of every dollar of income that was promised to them.  A record-breaking number of failed pension programs have been turned over to the government- run Pension Benefit Guarantee Corporation (PBGC).  As a government entity, the PBGC does not have to pay all the benefits promised to retirees in the original pension plan.

Here are some facts of which few retirees and pre-retirees are aware.  If you are age 60, your maximum monthly pension that the PBGC pays would only be $2,925, even if you were “promised” a much larger pension.  Many Americans whose pension plans have gotten into trouble have been surprised by how little they receive from the Pension Benefit Guarantee Corporation.  Countless numbers of retirees who thought they had a “guaranteed” retirement of a certain number of dollars per month have had to either radically downsize their lifestyles or go back to work when the PBGC took over their pension plan and reduced benefits.  Employees of small and mid-sized companies have fared even worse than employees of large companies. This is because many small companies do not have any type of pension plan or 401(k) program due to the cost.  Employees who do have some type of retirement program lost hundreds of billions of dollars in the stock market crashes of 2000 to 2002 and in the stock market meltdown of 2008.  What will happen with the volatility we are facing now in 2011 that may follow into 2012?

If a person has any type of retirement program at all today, it is most likely to be a 401(K). As you know, 401(k) plans are totally exposed to stock market volatility and risk  You truly have no guarantee of a safe, secure retirement if you have a 401(k) plan.  Most Americans do not have much money saved for retirement and this is one of the reasons they feel so much anxiety and fear when they think of their retirement.   Of the money that is saved for retirement, much of it is exposed to stock market risk.

If retirement security is important to you, then it’s time to take action.  Our goal is to help as many Californians as possible enjoy total retirement security through education and guidance.

Warmest Personal Regards,

Lance

Originally the programs were established by state governments as either prepaid tuition programs to specific state educational institutions or savings accounts that produced tax-free interest and, unlike IRAs, tax-free distributions. The prepaid tuition programs gave taxpayers the comfort of knowing that future college tuition costs could be funded at today’s prices. Later amendments to the programs expanded the availability of state schools and even allowed private schools to provide prepaid tuition programs. For those willing to assume more risk for potentially greater returns on their investments, college savings plans provided an opportunity to take advantage of market rate returns without the burden of income taxes. Programs are now available in all 50 states and the District of Columbia. Unlike many of the recent tax programs offered by Congress, these plans have been available to taxpayers regardless of income levels and have proven popular.

The basic college savings plan allows a parent to create an account to help pay for a child’s future college costs. The contributions made to the account generate investment income in the form of interest, dividends, and capital gains, which accumulate in the account tax free. Eventually, the contributions and the accumulated investment income can be withdrawn tax free from the account for qualified educational expenses.

But even in its simplest form, as with most things in life, the devil – and opportunity – in a 529 plan is in the details. Contributions by a parent to a 529 plan for the benefit of a child are considered taxable gifts (taxable for gift, not income tax purposes), and the contributor to a plan therefore should be aware of gift tax issues and the special election available to 529 plans when funding an account.

In general, distributions will be tax free if they are for tuition, books, reasonable room and board, and other expenses required for attendance at universities, colleges, and even vocational schools. Because of the typical long-term nature of these plans, any number of life events may create complex situations for the owner or beneficiary of an account. Guidance is available from the IRS regarding, among other things, (1) when a beneficiary decides not to continue education after high school; (2) the death of a beneficiary; and (3) the timing of reimbursements for the qualified expenses.

In today’s economic environment, investors of all stripes have been affected by global financial problems. In general, college savings plans have fared no better than other investment portfolios, and the same declines that are seen in 401(k) accounts throughout the country are also affecting 529 plan accounts. Unfortunately, once a 529 account has been funded, the account owner and the beneficiary have a limited ability to redirect their investments within the account. If they are dissatisfied with investment performance, there may be little choice but to change accounts. However, that may not be all bad, because 529 plan accounts may be rolled over into another account tax free (again, there are details to be considered).

In many cases, individuals with existing 529 plans may now find that the investments in their 529 plan accounts have a lower market value than their cost. Even in these circumstances, tax planning opportunities may present themselves. Liquidation of a 529 plan account by the owner of the account can result in a taxable loss on the taxpayer’s individual income tax return if investment losses have reduced the value of the account below the basis in the account. In the right situations, the loss can be deducted on Schedule A as a miscellaneous itemized deduction.

Of course, this opportunity isn’t right for everyone. First of all, if the taxpayer is subject to alternative minimum tax, increasing itemized deductions will not reduce taxes, and as a result there would be no tax benefit from the loss. The losses are totally disallowed in the calculation of AMT and, as miscellaneous itemized deductions, 529 plan losses (with the other miscellaneous deductions) are subject to the 2 percent of AGI limitation. The loss can be taken only if the entire account is liquidated (the owner can have other 529 plan accounts that do not have to be liquidated, but with more than one account, the analysis gets complicated). And if the original contributions to the account were deductible for state tax purposes, the liquidation may result in a smaller loss for state tax purposes or may trigger a state income tax liability.

Qualified tuition programs are entering their 13^th year. Like many teenagers, they can be difficult and frustrating, but a long-term view of them can reveal great potential. Many states are struggling to find answers to staggering budget deficits. Higher education budgets are being cut, and state and private tuition costs are increasing. Now more than ever, these plans are worth considering by those who have  grandchildren and want to help with their college tuitions.  Talk to a professional about the difference between using a qualified plan to save for college verses a life insurance plan which offers a 100% tax free benefit and in many cases may be more beneficial.

Each family is unique in their financial situation and their planning, therefore there is not one solution for all, I do believe however that both have their advantages and disadvantages.  I can tell you after just one meeting which one will work best for you and your family and take you through the steps to set up your college planning but be sure to consult wit your tax professional (or ours) before making any final decision.

Lance

The buckets designated for the first few years of retirement will hold the most stable, secure investments, so retirees know their immediate income needs are covered. The buckets designed for later years, meanwhile, hold riskier fare meant to generate portfolio growth over the longer haul.

While some financial planners have used a basic bucket approach for decades, the strategy has gained popularity in recent years. That’s partly due to the recent market swings. When retirees know their next five to ten years’ worth of expenses are stashed away in conservative holdings, they gain confidence to remain invested in stocks through volatile times.

Norm Mindel, managing partner at Forum Financial Management in Lombard, Ill., says a bucket approach helped almost all of his clients stay in the market during the financial crisis. “They can sleep at night knowing they have money for the next ten years,” he says.

The bucket strategy marks a significant departure from old retirement rules of thumb. By starting with an assessment of how much annual income the retiree needs, rather than how much can be “safely” withdrawn from the portfolio each year, it reverses the approach used in one of the most dominant, and hotly debated, drawdown strategies — the “4% rule.”

Here’s how the 4% rule works: In the first year of retirement, the investor withdraws 4% of his total nest egg, or $40,000 from, say, a $1 million portfolio. Each year, that dollar amount is adjusted to keep up with inflation. Assuming 3% inflation, for example, this investor would withdraw $41,200 in the second year of retirement, $42,436 in year three, and so on.

While the 4% rule is simple to follow and gives a portfolio good odds of lasting a lifetime, many advisers object to its rigidity. Retirees withdraw a set amount each year, regardless of their actual income needs and the investment performance of their portfolio.

What’s more, when making their inflation-adjusted withdrawals, retirees following the 4% rule tend to sell more shares when the stock market is down and fewer shares when it’s up — a reversal of the “dollar-cost averaging” approach, in which investors regularly buy a set dollar amount of stocks so that they’ll buy more shares when prices are low. “Dollar-cost averaging out of the market is the worst thing to be doing during retirement,” says Paul Grangaard, a St. Paul, Minn., adviser.

The drawbacks of the 4% strategy became clear during the economic downturn. By taking inflation-adjusted distributions from shrinking portfolios, retirees faced the prospect of outliving their nest eggs. They were advised to skip their inflation adjustments or to take less than 4% of the new, smaller balance.

A bucket strategy aims to address such concerns by taking withdrawals from more stable cash and fixed-income holdings, leaving riskier stock holdings plenty of time to recover from market downturns. And each bucket can be designed to deliver a different amount of income to respond to fluctuating needs, if, for example, the retiree plans to travel a lot in his first five years of retirement but expects spending to decline after that.

There are many versions of the bucket strategy, and some are so complex that they require the help of a financial adviser. But do-it-yourselfers can implement basic elements of the strategy in their own portfolios.

Filling the Buckets

To start, consider the amount of money you’ll likely spend annually in the first five years of retirement. Then, after factoring in Social Security, pensions and any other steady sources of income, decide on how much to draw from your portfolio each year to cover expenses.

Money to cover that five years’ worth of spending should be invested in the safest holdings, so accept a 1% or 2% return and forget about going for growth, advisers say. You might invest in a money-market fund to deliver income for the first year, for example, and buy certificates of deposit that will mature in years two, three, four and five. Short-term, high-quality bond funds, a “ladder” of Treasury bonds maturing in each year, or a single-premium immediate annuity could also go in this bucket.

Although you can begin using a bucket strategy after you’ve entered retirement, it’s best to start thinking about your first bucket roughly five years before you actually retire. While the bucket holds low-yielding investments, those who plan ahead may be able to time their purchases to coincide with higher interest rates that offer a more generous income stream.

With interest rates so low today, of course, it can be painful to put a full five years’ worth of living expenses into holdings that yield next to nothing. Harold Evensky, president of Evensky & Katz Wealth Management in Coral Gables, Fla., addresses the issue by putting two years’ worth of assets into money-market funds and short-term bond funds, and another three years’ worth in short- to intermediate-term bond holdings. No one should invest in riskier holdings, he says, unless they have at least a five-year time horizon for that money. “The risk of investing is having to take your money out at the wrong time,” he says.

Many advisers design the second bucket to cover another five years’ worth of living expenses, and fill it with slightly riskier investments. Appropriate holdings might include high-quality intermediate-term bond funds, global bond funds and a small allocation (under 20%) to well-diversified stock funds. After your first five years of retirement, you can use the money in this second bucket to replenish your first bucket — for example, buying another five-year ladder of CDs or Treasury bonds.

Francis Cartwright, a 69-year-old retired software engineer in Phoenix, started using the bucket approach about five years ago. In his first bucket, he invested in short-term bond funds and targeted a 2.5% annual return. Now he’s ready to replenish that with his second bucket, where he aims for a 4% annual return and holds a range of conservative mutual funds. So far, Cartwright says, the plan is on track and he’s pleased with the strategy “because you have money set aside for current needs.”

To keep your plan relatively simple, you can design the third bucket to hold the remainder of your portfolio. In this segment, it’s appropriate to go after some growth. Forum Financial’s Mindel, for example, devotes 50% to 70% of this bucket to stocks.

Refilling the Buckets

Advisers recommend a combination of strategies to help balance your portfolio, minimize costs and keep near-term expenses covered. The key point is to always draw spending money from your safest assets.

Let’s say you have one bucket holding a five-year CD ladder, another bucket holding short- and intermediate-term government bond funds, and a third filled with broadly diversified stock and bond funds. While you’re spending from your initial five-year bucket, you don’t need to constantly refill it to maintain a five-year lifespan — but don’t ignore the other segments, either. Review the entire portfolio at least annually. If the third segment is performing much better than expected, take some profits and use them to extend your CD ladder, if needed, or to bolster your conservative-investment cushion in bucket two.

Mindel targets a 6% to 7% annual return for the bucket that holds 50% to 70% stocks. If a big market rally pushes this segment well ahead of the target, he’ll sweep some of the profits into safer holdings.

If your riskier investments aren’t performing as well as projected, avoid tapping them for the moment. Your ten-year cushion of conservative holdings gives you time to dial back spending while you wait for them to recover. Given the long time horizon, a 3% to 5% reduction in annual spending can help keep the plan on course.

You’ll also need to periodically rebalance your growth-oriented segment, and that offers another opportunity to refill your safer buckets. Let’s say your growth bucket has a targeted allocation of 50% stocks and 50% bonds. You should rebalance if market movements shift that mix by more than ten percentage points — say, to 60% bonds and 40% stocks, Evensky says. When you sell some of those bonds to rebalance, you can use some cash to refill your safer buckets.

After the first five-year period, you should have sufficient assets in your second bucket to rebuild the five-year ladder of CDs. Even if there has been a slight decline in those bond holdings in the second segment, the combination of your periodic profit-taking, rebalancing adjustments and portfolio growth should be enough to cover expenses for another five years.

Keep costs in mind when employing a bucket strategy. Low-fee index-tracking funds can be important cost-saving tools. Investors should also weigh the total size of their portfolio against trading costs and tax consequences when determining whether a bucket strategy makes sense. Many advisers say the costs of the strategy are too burdensome for portfolios under $250,000, and some say a bucket approach is best reserved for portfolios over $1 million.

Adding Extra Buckets

While a do-it-yourself bucket approach may use only three basic segments, some advisers slice and dice a client’s retirement into six or more five-year buckets, each with its own investment mix and targeted return. But this approach may be too unwieldy for retirees to pursue on their own — and if not managed properly, transaction costs and taxes can undermine the plan.

Philip Lubinski, founding partner of First Financial Strategies in Denver, builds a bucket for each five-year segment of a client’s retirement. While an immediate annuity or laddered CDs might fill the first bucket, investments grow slightly more aggressive with each subsequent segment. The second bucket might have 20% stocks and 80% bonds, while the last bucket is 100% stocks. These later buckets are composed of exchange-traded funds, which offer broad diversification and help keep costs “as low as possible,” Lubinski says.

Similarly, Grangaard oft en uses Treasury bonds in clients’ first two segments, and then creates a series of five-year segments holding low-cost ETFs. When a client hits age 90 or so, the plan is to create a new segment by buying an immediate annuity to provide income for the rest of the retiree’s life. While some clients ultimately opt not to purchase this final annuity, “at least when they’re 65, we know we can put a plan together that will take care of them for the rest of their life, not just the first 30 years” of retirement, Grangaard says.

For do-it-yourselfers, online tools can help ensure that your spending level is appropriate and your plan stays on track. A new feature of the ESPlanner financial-planning soft ware developed by Boston University economics professor Laurence Kotlikoff shows investors how much they can draw out of their safe assets and still maintain their living standard throughout retirement. Using this “Upside Investing” feature, available at https://basic.esplanner.com, riskier stock-market assets aren’t touched until they’ve been converted to something safe, like Treasury inflation-protected securities. A version of ESPlanner that saves personal data and includes the Upside Investing feature costs $60.

For retirees who need a helping hand, financial services firms are launching new products that do some or all of the work of creating the buckets and making certain that they remain filled. These products are available through financial advisers.

RetireSense, launched by Nationwide Financial Services in 2007, helps advisers divvy up assets that clients will spend in various stages of retirement. It first suggests an annuity to cover essential expenses for life, and then creates buckets to cover discretionary spending in five-year increments. The buckets can include cash, laddered bonds, mutual funds and variable annuities that offer some stock-market exposure but also have a guaranteed floor in case of market declines. Investors should have at least a $350,000 retirement portfolio to use the plan, says Kevin McGarry, director of retirement income strategies at Nationwide.

Another new product relies on much simpler holdings: individual bonds. The Defined Income separate account, launched last year by Mill Valley, Cal., money manager Asset Dedication, offers a highly personalized fixed-income portfolio that can cover near-term income needs in a bucket strategy. The firm creates a mix of CDs, Treasury inflation-protected securities and other high-quality bonds that will deliver the exact amount of income the retiree needs for a certain number of years. With that income locked in to cover expenses for, say, five or ten years, the retiree can then maximize his investments in higher-growth assets, such as stocks.

The Asset Dedication product is available through registered investment advisers and charges fees of 0.35% of assets. The minimum investment is $100,000.

If you own a Universal Life Policy, there is a possibility
that the policy is not doing what you had intended. Even worse, the policy may
be imploding on you. In a previous article “Universal
Life Insurance – Strategic Tool or Ticking Time Bomb?” I discussed how and
why such a policy may be failing. Don’t worry, Universal Life policies are
actually a very strategic tool, and even those that are performing poorly can
be fixed.
There are several ways in which a life insurance policy may be failing you,
but for now let’s focus on Universal Life policies that are imploding. By
imploding, I am referring to policies that are seeing an increase in premiums
in order to keep the policy in force. In other words, if you maintain the
current premium level, your policy will lapse in X number of years. Usually “X
number of years” is too soon.
There are several main options you can take to correct an imploding
Universal Life policy:

1. Adjust the premiums higher
2. Add a lump sum of money
3. Adjust the death benefit
4. Replace the policy

Adjusting Premiums:
The first step to handling this situation is to determine what it will take to
get the policy back on track. Call up the company and ask for this specific
information. They should be able to tell you the premiums required to keep the
policy in force for your desired time period.
For instance, let’s assume Peter, a 65 year old, wanted his Universal Life
policy to last at least through his 105th birthday. Let’s also assume that his
current premium of $145 per month will result in the policy lapsing in 6 years
at age 71. This means that at 71, Peter will be faced with a large premium
increase or the policy will lapse. Peter does not want this scenario, so he
calls his insurance company and they tell Peter that if he pays $273 per month
going forward, the policy will remain in force through age 105.
In this example, the premiums needed to keep the policy in force through the
desired time-line are almost double the current amount. Although this is a
financial burden, it may be the most efficient way to maintain the insurance
coverage you need.

Add a lump sum of money:
Like increasing your premiums, you can get your Universal Life policy back on
track with a cash infusion. This can be accomplish by perhaps paying off a loan
you have taken on the policy or by just adding a lump sum of cash to the
policy. The increased cash value can then be used to offset future premiums,
allowing you to maintain the policy in force for your desired timeline. Keep in
mind that over-funding or adding extra money to a life insurance policy can
lead to tax implications that must also be considered.

Adjust the death benefit:
The cost of the life insurance is partially related to the amount of coverage
or death benefit. So, if you find your policy is imploding and do not want to
increase your premiums to keep the policy in force, you can consider lowering
the face amount, or death benefit, of the policy. By working with the insurance
company, you can potentially find a death benefit amount that results in a more
appropriate premium amount. However, keep in mind that while it is easy to
lower your death benefit, should you want to raise it in the future, it won’t
be as easy. To raise the death benefit to prior levels will most likely require
a new round of underwriting to prove you are in good health.

Replace the policy:
If you have determined that the cost of keeping your current policy in force is
too high, but you want to maintain the amount of coverage, you can look at
replacing the policy with a new one. Before you consider replacing a life
insurance policy, keep in mind that it isn’t as simple as calling a different
company and asking to switch. Life insurance replacements can be tricky and
should be handled with care.
The primary rule of replacing a life insurance policy is – don’t stop
payments or cancel your current policy. While you might be shown a quote for a
new policy that is more favorable, until that new policy is issued, you don’t
have anything. More often than not, people who attempt to replace their current
policies wind up sticking with what they have. If the new policy doesn’t work
out, you don’t want to find yourself without any coverage.
Keep in mind that an insurance company often does not care about your
existing policy (although some carriers do have programs that will honor
existing policy ratings). What you are fundamentally doing is obtaining a new
life insurance policy. With that comes a new set of underwriting requirements-
medical tests and medical record reviews. Just because you qualified as
preferred when you obtained your current life insurance policy 10 years ago
does not mean you would qualify for a preferred rating now. If your health
situation has deteriorated since your first policy was issued, it may be
difficult to find a reasonably priced replacement.

Another important consideration is the cash value of your existing policy.
Usually if your policy is imploding, you cash value is minimal to none. If
there is cash value when replacing a policy, you must determine what to do with
it. If you replace the policy, you can take the cash and put it in your pocket,
but there are tax implications of such a move. An alternative is known as a
1035 exchange. 1035 is a reference to the IRS code for handling cash values in
life insurance exchanges. You can take cash value from one life insurance
policy and transfer it to another life insurance policy without the tax
penalties you might experience if you simply cashed out the policy.
When it comes to replacements, many people are surprised to
find that they can improve their life insurance situation. Between the
overall decrease in life insurance prices over the years, and the relatively
high costs of poorly managed policies that are imploding, it is often wise to
review options.

Regardless of how you handle an imploding Universal Life policy, it is
important to stay on top of it. Complacency has been the downfall of many good
intentions with life insurance. If you review your policy regularly, you will
be in better control and most likely more satisfied with the results. If it has
been a few years or decades since you reviewed your policy with a professional,
now is a good time to be proactive.