Retirement
More Regulations Coming For Reverse Mortgages
Tuesday, October 16, 2012 17:03

Tags: reverse mortgages

When used correctly reverse mortgages can be a great way for retirees to pay the bills in retirement without selling their home. However, because fraud claims have been skyrocketing, the new Consumer Financial Protection Bureau is writing more rules for this product. A good article on this appears here.

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If advising clients to use a reverse mortgage it is important to point out some of the drawbacks, namely:

  • High upfront costs
  • It can eliminate their eligibility for Medicaid
  • All equity can be gone by the time they pass away, leaving nothing for heirs
  • Clients might now have to pay mortgage insurance
  • Complexity of the mortgage- It might not be easy for them to understand 

There is also the option of simply refinancing the mortgage, which in general has lower fees and costs involved. Either way, it is of course vitally important that clients do not run out of money in retirement. If they are cashing out equity in the hopes of spending it all before a certain age, they might be in for serious trouble down the road if either a) they live longer than expected or b) they need more money later on for medical care.

 

Reverse mortgages can sometimes be a useful option, but they are fraught with risks. Clients need to understand the risks and the costs involved.

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Less Than A Third Of Seniors With Financial Planners Discuss Medicare With Them: Says Study, But Some Advisors Do Address Healthcare Costs
Monday, October 08, 2012 14:13

Despite significant concerns about healthcare costs, less than one-third of seniors working with a financial planner discuss Medicare with their advisor, according to a new national survey.

Of client who discuss Medicare with their advisors, 79% reported their financial planning professionals  are knowledgeable or extremely knowledgeable about the federal insurance program, according to the Allsup Medicare Advisor® Seniors Survey: Seniors with Financial Planners.

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The Allsup survey also found that, although 71% of seniors with financial advisors said they will review their income and expenses in the next 12 months, only 58% plan to review their healthcare needs in the next 12 months. Medicare’s annual enrollment season, when all seniors can change plans for 2013, is Oct. 15 through Dec. 7, 2012.

“Allsup’s survey of seniors with financial advisors found that while only a small number discuss Medicare with their advisors, three of their five major concerns relate to healthcare and Medicare,” Mary Dale Walters, senior vice president of the Allsup Medicare Advisor, a Medicare plan selection service for Medicare-eligible individuals, said in a release.

“Financial and retirement planning professionals have a tremendous opportunity to assist their senior clients with Medicare plans and healthcare choices by helping them realize and prepare for the cost-related results of their decisions,” Walters added, according to the release.

In Reality, Some Planners Are Talking Medicare

Financial advisors, meanwhile, agree that there’s a tremendous opportunity to help senior clients with Medicare plans and healthcare choices.

Contrary to the survey’s findings, Aaron Coates, CFP, CIMA, a financial advisor at Valeo Financial Advisors, says 100% of his clients turning age 65 discuss Medicare plans with him. But none before or after the threshold, he says.

What’s more, Coates says he’s more than prepared to discuss Medicare with his clients, having just completed an internal CE session, featuring a speaker from United Healthcare a few months ago. The session featured a booklet, “Medicare Made Clear, Show Me Guide,” produced by United Healthcare that, Coates says, he refers back to regularly (including this past weekend with his mother who turns 65 soon).

Others advisors are dealing with their client’s Medicare questions as well, and not infrequently.

“It’s certainly something we bring up and spend a fair amount of time addressing with clients,” says Chip Workman, CFP, a financial advisor with The Asset Advisory Group.

For most, he says it’s simply a matter of walking them through the steps required ahead of the 65th birthday “to properly file and analyzing what supplemental plans are best suited for their needs.”

In his case, Workman says his firm often has clients with supplemental plans as part of their retiree benefits through their former companies.

And in some cases, Workman will bring an outside expert in to deal with his clients on a case-by-case basis.  “When called for, we have an expert we turn to who can walk through a client’s list of prescriptions and other needs and make a recommendation as to what best suits their needs,” Workman says.

In addition, Workman says the outside expert delivers a presentation to the firm’s clients once per year. “We also turn to this expert to present an annual ‘lunch-and-learn’ session for those clients approaching age 65 or who might be due for an evaluation of their current Medicare planning beyond 65,” Workman says.

After these sessions, Workman says his firm is able to calculate and address their client’s specific healthcare costs and concerns.

Others aren’t missing the opportunity to talk with clients about Medicare, as well. “We proactively discuss Medicare with all of our clients as they approach eligibility and discuss satisfaction with the current plan our Medicare participants are on each year,” says Joe Pitzl, CFP, of Intelligent Financial Strategies. “The planning element leading up to Medicare eligibility is crucial and poor decisions (or indecision) can result in some steep penalties. It is a very confusing and stressful subject for clients that literally weighs on them for years as they near eligibility.”

 

In addition, Pitzl says he feels more than very qualified to talk about (Medicare and healthcare costs), plan for that transition, and recognize when a change of plans may be warranted. “However, the plans themselves change frequently, companies offering coverage change, and formularies change often enough that I do not consider myself an expert on specific policies, particularly when nearly half of our Medicare-eligible clients live out of state,” he says.

The Exceptions

Not all advisors are dealing with Medicare questions, however, though for obvious reasons.

Some advisers, for instance, report having clients who are pre-Medicare. “The most frequently asked question I receive regarding health insurance,” says Mark Van Drunen, M.S., CFP, a partner with Ownership Advisors, “is how to get to age 65.”

The real struggle, he says, is when somebody retires at age 62 and where are they going to get health insurance for the next three years.

Others are in the same boat.

“I have to be honest, most of my clients are pre-65, and it's been a while since it's come up,” says Rob Schmansky, CFP, of Clear Financial Advisors, who agrees with the Allsup’s survey findings. “I think it's true that advisors generally do not begin the (Medicare) conversation.”

Schmansky speculates that there are at least two reasons why this is so. One, many clients may feel (Medicare) is outside the realm of an advisor's expertise. And two, clients may not be comfortable discussing their medical needs with their financial advisor. “Many seek advice online and from other sources to make sure they are covering their unique medical needs,” Schmansky says.

The Need Is Great

“I think this is a huge issue, and too often is being overlooked,” says Sheryl Garrett, CFP, AIF, a managing member at Garrett Investment Advisors and founder of the Garrett Planning Network. “It’s essential for financial planners to be equipped to raise these questions and discuss the (Medicare and healthcare) options with clients.” 

And the reasons are obvious. “More and more health insurance decisions are being transferred to the insured,” she says. “The healthcare area, Medicare options and Medigap policies is one of the most important considerations that many retirees will face.”

And fortunately, says Garrett, advisor members of her network and many others who are seeking out “additional training are exposing themselves to the options and opportunities our clients face, and hopefully can help make people aware of their options and help them select which option(s) may be best for their unique needs.”

For instance, Garrett Planning Network just finished a webinar for its members on this subject.  “It’s an update and repeat of one we did last December during open enrollment,” she says.  “Also, there are enough changes that apply and the speaker (one of our members) discussed insured options to change coverages.”

In addition, Garrett recalls listening to “great presentation” from Dr. Katy Votava of GOODCARE.com at the FPA conference.  “She really opened some eyes about the amount of planning that can and should be done to assist clients in planning most effectively for their healthcare needs in retirement,” she says.

And, she notes that Louise Schroeder, another member of Garrett Planning network, delivered a presentation to the network and as well as one at this year’s FPA conference on helping our clients age successfully.

“A portion of the industry is becoming much more holistic about the subjects we spend our money on,” says Garrett.  “Healthcare in retirement is a critical piece of that puzzle.  But, most of us need a lot of initial and continuing education just to keep up with the options, and know where to turn for help.”

Like Schmansky, Garrett thinks a lot of seniors do not assume financial planners or advisors provide guidance about Medicare.  “In fact, I think a lot of people don’t know they can make changes to the Medicare coverage and how to determine if they should,” she says.  “These individuals don’t know where to turn for guidance. The agents selling the policies are often all they know of. This was exactly why financial advisors must bring the conversation to the table. In many states an advisor would have to have a health insurance producer or consultant’s license and that may be one reason that this subject may not be being addressed as commonly as it should be.”

For what it’s worth, HealthView Services is among those firms building technology solutions to help advisers determine healthcare costs in retirement for the clients of advisors. The company has an online calculator that can be used to determine healthcare costs in retirement.

Other Key Findings

Seniors with financial advisors are more likely to save specifically for healthcare expenses than seniors without advisors, 41% vs. 27%; and are more confident in their healthcare savings, 70% vs. 58%. Of 1,000 seniors surveyed across the country, one-third reported using a financial planning professional for retirement planning. The information collected for the Allsup survey is part of a larger survey of seniors who are enrolled in Medicare. The study was commissioned by Allsup and conducted by Richard Day Research, a Market Probe Company based in Evanston, Ill.

 

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How Inflation Eats Away At Retirement Plans
Thursday, October 04, 2012 10:28

Tags: inflation | retirement plans

Although the rate of consumer price inflation (as measured by the Consumer Price Index) is running at a subdued 1.7% year-over-year, the risks are increasing for higher inflation down the road. The Federal Reserve recently said it will continue to pump money into the financial system by buying billions of dollars worth of mortgage securities every month. This, combined with the trillions they have already pumped into the system, has potential to ignite much higher inflation over the coming decade.

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Most people understand that inflation can be the worst enemy of those living on a fixed income. It erodes the purchasing power of any investments that don’t go up with inflation and the portion of investments that actually do rise with inflation are taxed, further reducing the investor’s purchasing power. Because gains due to inflation are generally taxed, even those not on fixed incomes and fully invested in stocks or commodities take a hit.

 

Although many do understand how insidious inflation can be when it comes to their investments, they have no way of quantifying how much of an impact an increase (or a decrease) in the inflation rate will have. So it’s useful to run scenarios where we can actually see the impact of rising prices on a person’s overall wealth and retirement situation.

 

Using our Retirement Planner, I started out by looking at a couple that is 40-years-old and is invested 50% in equities and 50% in bonds. They have $300,000 saved and plan on retiring when they are both 62. They will also have $40,000 in recurring expenses in retirement. Inflation is assumed to be 2% per year, equities return 6% per year, and bonds return 1% per year. Under this scenario, taking into account social security payments they will receive and all taxes, this couple will not run out of money in retirement until they are 101 years old.

 

But what happens if the rate of inflation rises by just two percentage points to 4%? To make the scenario more realistic, I also had all annual returns increase by two percentage points as well. With inflation of 4% rather than 2%, this couple will run out of money when they are 96. Because gains due to inflation are taxed, yet expenses rise by the full amount of inflation, this couple will see their first shortfall in retirement a full five years earlier.

 

Now let’s look at a couple that is closer to retirement and is 55 years old. They have $300,000 in relatively safe short-term treasuries, will have $40,000 in recurring expenses in retirement, and will see their first shortfall in retirement occur at age 95. In a situation like today, inflation can be much higher than the yield on short-term bonds. So I ran a scenario where the return on their short-term bond holdings is only 0.5% and inflation again rose from 2% to 4%. Under this outcome, this couple will see their money run out not at age 95, but at age 82. With inflation rising by two percentage point, this couple just saw 13 years knocked off of their nest egg!

 

What these scenarios show is that inflation can severely diminish a person’s hard-earned wealth. But it is especially damaging to those on a fixed income when short-term rates are being held near zero while prices continue to rise. Not only are expenses rising as prices increase, but those on a fixed income watch their already paltry yield reduced by their full marginal income tax rate, not the lower capital gains tax rates that equity investors usually see.

 

So what can be done in this situation? The first thing nearly every investor should be doing is sheltering as much of their wealth from taxes as they can in tax-deferred accounts such as 401(k) plans and IRAs. That way any gains due to inflation will not be taxed right away.

 

One of the best hedges against inflation that works well in a tax-deferred account is Treasury Inflation Protected Securities (TIPS). The principal balance of these securities moves in tandem with the Consumer Price Index (CPI). However, it is important to keep in mind that interest and any gains due to changes in the CPI are taxed as ordinary income. That is why these securities should normally be held in a tax-deferred account, if possible. TIPS can be bought as physical securities or through ETFs such as TIP or through mutual funds such as VIPSX.

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Advisors Need To Help their Older Clients Stay Employed Or Get Re-Employed
Monday, September 10, 2012 17:11

Tags: human capital | older workers | retirement

Financial advisors will increasingly need to help their older clients figure out what it takes to stay in the workforce or re-enter the workforce. The reason being this: Many older Americans, including those who are clients of advisers, will need earned income to make ends meet in retirement.

Trouble is very few advisors know how to help their older clients stay employed or get re-employed. They don’t know what skills or knowledge or experience might be needed for their clients stay employed or get re-employed. And they don’t necessarily know where to send their clients to acquire the skills, or knowledge or experience required to stay employed or get re-employed.

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Make no mistake: This will be a big problem, especially in light the job displacement of older Americans.

“Older workers (aged 55 and over) after being displaced were less likely than their younger counterparts to find work and substantially more likely to drop out of the labor force, according to a report just published by Sara Rix of AARP’s Public Policy Institute. “Long-tenured older workers, i.e., those who had been in their jobs for at least three years, were about 28% of the workers displaced from 2009-2011 but only 21% of the displaced workers who were reemployed.”

Here’s the rest of Rix’ report:

From January 2009 through December 2011, 2.5 million workers aged 55 and older were displaced from their jobs according to the Bureau of Labor Statistics; 1.7 million (68.5%) of them had been in their jobs for at least three years and were considered long-tenured workers. Displaced workers are those who lost or left their jobs because of a company or plant closing or move, insufficient work, or the abolition of a position or shift.

The number of older workers displaced in the three-year period 2009 through 2011 was lower than it was from 2007-2009, when 2.7 million older workers had been displaced, 1.8 million (65.6%) of them long-tenured workers.

Older workers were substantially less likely than their younger counterparts to find work after displacement—just under half of workers aged 55-64 were working as of January 2012, compared to about six in ten aged 25 to 54 (tables 1a and 1b).  Even the youngest displaced (20-24) had a higher reemployment rate than older displaced workers.

Workers aged 55 and over were nearly 20% of all workers displaced from 2009 through 2011; they were, however, only about 15% of the reemployed (table 2, top panel).  The data for long-tenured workers also show that older workers were underrepresented among those who had found work as of January 2012—they were 28% of the long-tenured displaced but only 21% of the reemployed (table 2, bottom panel).

Less than one-fourth of displaced workers aged 65 and older had found work by January 2012.  Displaced workers in this age group were far more likely to drop out of the labor force.  A sizable portion of workers aged 55-64 also left the labor force.  In fact, workers in this age group were about twice as likely as prime-age workers (aged 25-54) to leave the labor force after displacement (tables 1a and 1b).

Reason for displacement varied by age, at least among long-tenured workers (table 3).  The youngest workers were most likely to have been displaced because their plant or company closed down or moved.  Having their position or shift abolished was a more common reason among older workers than younger.

Rates of reemployment were higher for all age groups as of January 2012 for people displaced from 2009 through 2011 than as of January 2010 for people displaced during 2007 through 2009.  This was the case for all displaced workers and for those who had lost long-tenured jobs.  In both years, younger workers fared better when it came to reemployment.  Displaced workers were also somewhat more likely to have dropped out of the labor force by 2012 than as of 2010.

Table 1a: January 2012 Employment Status of All Workers Who Lost Jobs, 2009 through 2011

 

Age

 

Employed

 

Unemployed

Not in Labor Force

 

Total

Total, 20+

56.9%

27.5%

15.7%

100.0%

20-24

54.4%

27.2%

18.4%

100.0%

25-54

60.7%

27.4%

11.9%

100.0%

55-64

49.2%

28.3%

22.5%

100.0%

65+

22.3%

27.2%

50.5%

100.0%

 

Table 1b: January 2012 Employment Status of Long-tenured Workers* Who Lost Jobs, 2009 through 2011

 

Age

 

Employed

 

Unemployed

Not in Labor Force

 

Total

Total, 20+

56.0%

26.7%

17.4%

100.0%

20-24

61.7%

22.4%

15.9%

100.0%

25-54

61.5%

26.2%

12.3%

100.0%

55-64

47.4%

28.1%

24.5%

100.0%

65+

23.5%

27.5%

49.0%

100.0%

*Long-tenured workers had been in their jobs for at least three years.

Table 2.  Age Distribution of Workers Displaced 2009-2011 and Reemployed as of January 2012

 

 

 

 

 

Age

Number Displaced

(in 000s)

Age Distribution of Displaced

Age Distribution of Reemployed*

All displaced

 

 

 

Total, 20+

12,854

100.0%

100.0%

20-24

1,118

8.7%

8.3%

25-54

9,220

71.7%

76.5%

55+

2,515

19.6%

15.1%

    55-64

2,006

15.6%

13.5%

    65+

509

4.0%

1.6%

 

 

 

 

Long-tenured**

 

 

 

Total, 20+

6,121

100.0%

100.0%

20-24

128

2.1%

2.3%

25-54

4,268

69.7%

76.6%

55+

1,724

28.2%

21.1%

    55-64

1,338

21.9%

18.5%

    65+

386

6.3%

2.6%

Calculated from Tables 1 and 8 in Worker Displacement: 2009-2011.

*Employed as of January 2012.

**Long-tenured workers had been in their jobs for at least three years.

Table 3.  Reason for Displacement, Long-tenured Workers*

 

Age

 

Plant/company closed down/moved

 

 

Insufficient work

 

 

Position/shift abolished

 

 

 

Total

Total, 20+

30.8%

39.5%

29.7%

100.0%

20-24

40.5%

39.3%

20.3%

100.0%

25-54

31.8%

40.2%

28.0%

100.0%

55-64

27.8%

37.0%

35.2%

100.0%

65+

26.7%

40.8%

32.5%

100.0%

*Displaced from January 2000 through December 2012 from jobs held for at least three years.

 

So why do advisers need to worry about all this?

Well, one reason is this: Many Americans age 65-plus who are collecting Social Security, and especially those who are in what’s called the upper income quintile, earn about 40% of their total income in retirement from working. It’s not clear from the research whether older Americans are working after age 65 out of need or want. But one thing is clear, they are working for money.

And advisors who want to stay ahead of the curve should heed the current statistics. Older Americans might have a tough go of staying employed or getting re-employed, according to AARP. And if advisors want to prove their worth, they ought to consider looking at ways to help improve their client’s human capital, not just improve their financial capital.

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Troika Of Market Factors Affecting Retirement Makes Planning Too Complex For Investors To Navigate On Their Own; They Need Your Help
Friday, September 07, 2012 08:26

Tags: investing for income | investment strategies | retirement income | retirement planning

In direct opposition to the advice given from PIMCO’s Bill Gross this week, BlackRock Inc.’s Quintin Price is advising older clients to hold more equities as they age. This advice is based on the new reality that people are living longer.

 

The troika of factors include the need for income, the need to preserve buying power, and the need to beat inflation. This is a new age in retirement planning and your clients need you to bring them into it with more customized, proactively monitored investment strategies.

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The advice traditionally offered to switch entirely from accumulation to distribution during retirement years is faulty. People now face 20 to 30 years of retirement life. Just two generations ago, expected retirement years fell into the 10 to 15 year time span.
 
With double the amount of time spent in retirement as well as the more active nature of retirement life in today’s world, cutting off growth can be a mistake. Investors are being forced to find new ways to invest during their retirements.
 
Investment strategies during retirement need to be more proactive and benchmarking investment strategies in light of client needs is becoming ever more important during those years.
 
Providing income has become quite a challenge with interest rates hovering near zero.
 
Higher income is offered in investment instruments and securities with higher risk. Many retirees grab these higher rates without being fully aware of the added risk they are taking.
 
The issue in retirement is that investors do not have time on their side in making up for an investment mistake. So the need to balance income needs with continued growth within a reasonable risk management program becomes imperative.
 
To put some numbers on the longevity issue, the number of people in Europe who are over age 65 will increase to 19% in 2020. Japan’s ratio of those older than 65 is already at 23.9% of its population. The global life expectancy in 1950 was 48 years. 2010 saw that number rise to 70 years old .
 
The threat of inflation is where Price agrees with Gross. But in order to preserve buying power during retirement years, investors will need to invest in equities. High dividend paying equities can help to balance the need for income with the need for growth.
 
It all comes down to the fact that the traditional way of planning for retirement is not likely to work. Investors need you to do a thorough analysis of their particular situation to help them identify their goals, determine how achievable those goals really are, and design an investment strategy that will offer them the income they need with enough growth to keep them from running out of money and also to preserve buying power.

 

This is a much more complex picture than investors are likely to realize on their own.

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