Financial security during retirement is no guarantee. In fact, Outliving Your Money is the #1 fear among retirees. Not far behind are the fears of Losing Principal, High Health Care Costs, and Higher Taxes. Most people, including many financial advisors, do not know that each of these fears can be replaced with guarantees and control. This book shows you how. What would it be worth to eliminate these fears and not have to worry about uncertainty? You can guarantee financial security during retirement.

Fear Free Retirement

Enjoy Financial Peace of MindBy Richard E. Gearhart Sheilah Bower Steve Lawson

AuthorHouse

Copyright © 2011 Richard E. Gearhart
All right reserved.
ISBN: 978-1-4567-3118-2

Contents

Introduction................................................................ixSection 1: Eliminate Your Fear of Outliving Your Money......................1Chapter 1: The Right Tool for the Job.......................................3Chapter 2: Net and Gross Income.............................................5Chapter 3: Assumptions......................................................7Chapter 4: Retirement Income Options........................................11Chapter 5: Guaranteed Income Stream.........................................15Chapter 6: Annuities........................................................19Section 2: Eliminate Your Fear of Losing Principal..........................23Chapter 7: "What Financial Recovery?".......................................25Chapter 8: Market Options...................................................29Chapter 9: Insurance Companies..............................................41Chapter 10: Comparisons.....................................................47Section 3: Eliminate Your Fear of High Healthcare Costs.....................51Chapter 11: Healthcare is Freakishly Expensive..............................53Chapter 12: Reduce Your Risk................................................55Chapter 13: Insure Yourself.................................................59Chapter 14: Manage Health Risk..............................................63Chapter 15: Long Term Care..................................................65Section 4: Eliminate Your Fear of Paying High Taxes.........................69Chapter 16: Tax Introduction................................................71Chapter 17: Impact of Taxes.................................................73Chapter 18: Timing of taxes.................................................77Chapter 19: Options.........................................................81Conclusion..................................................................85Endnotes....................................................................91

Chapter One

The amount of money needed for a financially secure retirement depends largely on your lifestyle, health, and how long you will be retired. One of the most important elements in a successful retirement plan is having an adequate cash flow. People can be misled into thinking that the best way to achieve this is by squirrelling away huge sums of money in their savings account. Investment firms even air television ads that shout "the bigger, the better" regarding your bank balance on the day you retire. While having a large nest egg is beneficial, by itself it cannot guarantee you will not outlive your money.

Even though many investment companies and financial advisors stress the importance of a huge pile of money at retirement, there are three main flaws in their logic. The first flaw occurs when advisors assume there's only "one right tool for the job." The second flaw dismisses the important difference between net income and gross income when planning for the future. The third involves assumptions. Let me explain how these three flaws affect future retirement goals.

Flaw #1: "There's Only One Right Tool for the Job"

Have you ever purchased a car? Were you looking for the fastest car on the street, the one that could drive off-road the best, or the one with the best gas mileage? It would be great if one car could be the best at all of them, but you know that is not the case.

The Corvette is sleek and fast. The low profile and road-hugging body that make it fast are the very features that make it horrible to drive off-road. The higher wheel base of a Jeep makes it much better for traveling off-road and the wider body makes it more stable. Those same qualities make it less aerodynamic and not as fast. Corvettes have a lot of power to go fast and Jeeps have a lot of power for hauling. However, that power comes at a price. Neither is as fuel-efficient as a Toyota Prius.

What's the point of all of this? Financial products are often referred to as financial vehicles because they hold your money. Some financial vehicles are designed for growth, some are designed for an exciting ride (if you like roller coasters) and others are designed for distribution. In other words, the very features that make a mutual fund exciting are the exact features that make it a poor vehicle for distribution. On the other hand, there are specific financial vehicles that are designed only for distribution.

You can try to dress up a Jeep with a sport package and turbo charge it, but it still won't go faster than the Corvette. Of course the Jeep salesman will gloss over that fact while reminding you of the Jeep's off-road capabilities and how well it handles in snow. That is what most financial advisors tell you at retirement. There are many other options not available from your advisor so he quickly redirects you to a different feature (we'll explain why in the next chapter). Suffice it to say there are products that can guarantee you will never outlive them and these are often the right tool for the job. I will discuss these in detail in Chapter Six.

In the next two chapters, I will explain the other two flaws in the logic behind needing that huge pile of money at retirement: dismissing the difference between net and gross income, and assumptions.

Chapter Two

Flaw #2: Dismissing the Difference between Net and Gross Income

The second flaw comes from how we look at the difference between net and gross income: Assume you compare two financial vehicles as potential retirement income options. They can both generate an income of $4,000 per month. One of them is tax free and you get to spend all $4,000. With the other one you have to pay taxes of 15%, leaving you with just $3,400 per month. Are the two vehicles equal?

What if we combine this with the right tool mentioned above? Two financial vehicles can both produce $4,000 per month. Vehicle #1 has no taxes and Vehicle #2 is taxed at 15%. In addition, Vehicle #1 guarantees that $4,000 (with occasional increases) for as long as you live while Vehicle #2 should be able to pay you for 20 years. Depending on how the market performs, that could be shorter or longer. Which vehicle makes the most sense as a retirement vehicle?

All things considered, Vehicle #1 is obviously a much more desirable retirement vehicle. As a matter of fact, maximizing your retirement net income for life should be a much higher priority than maximizing the pile of money you have the day you retire. I have seen people retire with $400,000 in Vehicle #1 who had a greater guaranteed monthly income than people who retired at the same time with $700,000 in Vehicle #2.

If my $400,000 can outperform your $700,000, if it meets or exceeds all of my monthly expenses, is the actual number my most important concern? Or is it more important to meet all of my expenses and know that I'll never run out of money?

Let's think of it another way: Assume your expenses are $3,500 per month. Option A can guarantee a net income of $4,000 per month for as long as you live (and it will adjust for inflation.) Option B can pay you $4,000 gross each month, leaving you with $3,400 after taxes. And there's no guarantee that $3,400 will last as long as you do. So if you're allowed to decide, which option will you go with? The answer is obvious, so why do many people choose Option B? We'll explain that in the next section.

Chapter Three

Flaw #3: Assumptions

Now for the third Flaw that affects retirement goals. The flaw is the discrepancy between the assumptions and reality AND the discrepancy among advisors. As I've said, no one has a crystal ball with which to accurately predict the future. I can only do my best to develop strategies that are viable in nearly any "actual" situation. Most advisors, however, try to calculate exactly how much money you will need the day you retire and build around that number. But without a crystal ball their task is impossible.

Imagine you are 55 years old and have committed to get your retirement plan organized and on track. You are going to be thorough and interview three separate advisors. On Tuesday, Advisor A says you must have $193,032 at retirement to meet your needs. On Wednesday, Advisor B says you will need $516,897 to enjoy a comfortable retirement. On Thursday, Advisor C says you will require $1,306,480 for your needs. On Friday, you are more confused than ever. How could three advisors with comparable education and experience have such drastically different answers to that important question?

To answer that question, we are going to look at the first two scenarios listed below. Let's look into the assumptions these advisors made. All three scenarios assume:

• You are currently age 55

• Your current net income is $3,000 per month

• Inflation is 3%

Scenario #1

This scenario assumes you will work until age 67 and earn 7% on your money. It also assumes you will need 2/3 of your current income during retirement (since your house should be paid off, your cars should be paid off, and you no longer need to put money into a retirement plan). It assumes you will be in the 15% tax bracket. Therefore, you will need $2,353 per month in gross income to have a net income of $2,000 after taxes. It also assumes you will live to age 75, because the life expectancy of a male is 74.83 years according to the current Social Security tables. To provide an income of $2,353 per month until age 75, you will need $193,032 at retirement or $85,709 today (if you are not contributing to the retirement).

Scenario # 2

The only difference between Scenarios 1 and 2 is the life expectancy assumption. Instead of going by the Social Security life expectancy tables, Scenario 2 assumes you may need income until age 100. You will need $516,897 at retirement or $229,508 today. Since the only difference between the two is life expectancy, this directly illustrates the fear of outliving your money. Scenario #2 throws almost three times as much money at the problem, but it still does not guarantee you will never outlive your money.

If you do need income until age 100, yet your financial advisor says you should plan for age 75, you will be short nearly $325,000. I don't believe he will offer to make up his more than quarter-million dollar mistake.

If your financial advisor makes one faulty assumption based on life expectancy and you're down $325,000, what happens if he misses the mark on a couple more things? There are dozens of variables to consider when putting together a retirement plan. Let's look at one more scenario. This time instead of changing just one variable we'll change four: age at retirement, interest earnings, tax bracket, and replacing 100% of your current income instead of providing for two-thirds of your income.

Scenario # 3

The third scenario uses different, but still reasonable, assumptions. It assumes you retire at 63 and are earning 5% on your money. It provides you with your full net income ($3,000) at retirement. However, at the next tax bracket up (28%) it requires a gross monthly income of $4167. To be safe, it plans on providing you with income to age 100. At retirement, you will need $1,306,480 and you should have $884,277 today.

Even though in this scenario you live the same number of years as in Scenario #2, you need more than double the amount of money as you did in the second scenario.

What is the point of this? We are not claiming that we can predict the future better than other professional advisors. Quite the opposite. We do not try to predict the future and make you pay the price when we are wrong. We acknowledge that the future is unknown and prepare solutions that hold up under many different circumstances. Most importantly, we utilize financial vehicles that you absolutely cannot outlive. Before going into too much detail, let's examine the alternatives for providing your retirement income.

Chapter Four

Retirement Income Options

1. Live On Social Security Benefits

It was a noble idea. The Social Security system began in 1935 during the Roosevelt administration out of concern for the elderly, many of whom had lost their entire savings in the Great Depression. Although Americans were in favor of emergency public assistance, they did not support a permanent government pension plan. Social Security took the form of a social insurance program.

When it began, Social Security had 16 workers contributing into the program for every one beneficiary. Today there are about four workers per beneficiary. By 2030, when all the baby boomers have retired, the ratio will be 2:1. Workers will either have to pay more or recipients will have to receive less.

The Social Security Administration reported in 2009 that Social Security trust funds would stay out of the red until either 2016 or 2017, depending on which report you read.

In March of 2010 the Congressional Budget Office (CBO) changed its funding projections, admitting they were inaccurate. Citing the credit crunch, stock market crashes and high unemployment rates, the CBO said that sometime in 2010 the program would begin paying out more than it's taking in.

As Social Security starts requiring more money to remain solvent, there are two options. The government can:

1. increase taxes to pay for it, or

2. reduce benefits being paid out.

Tax increases to pay for wars and bailouts are inevitable because that money has already been spent.

It's not too late to start reducing Social Security Benefits.

Do you want to bet your retirement security that the government will increase taxes without reducing benefits?

A life insurance company conducted a survey of 1,101 consumers and economists between ages 24-70 in December 2009-January 2010. Results showed that 16% of economists and 11% of consumers believe that "despite signs of a recovery, we are likely headed back into a recession."

In March 2010 another survey revealed that 69% of Americans polled are looking to invest in vehicles safer than stocks due to uneasiness about the economy and the market collapse. Fortunately, these safer vehicles do exist.

2. Estimate the Amount to Pull out of Savings

Whether your retirement savings is sitting in a CD at the bank, in mutual funds on Wall Street, or at a variety of other locations, you may consider this as your retirement income strategy. On a regular basis, whether that is weekly, monthly, or some other time frame, you will just pull out the funds you need to live on until the next time you decide to pull money out. Do not feel badly. This is the strategy used by far too many retired individuals.

Advantage: This plan is flexible. You can pull out as much as you need (within reason) as often as you need it. When you have an unexpected expense, just pull out a little more. You have complete control ... sort of.

Disadvantage: Greatly justified fear of outliving your money.

Just tell me exactly how long you will live, exactly what your retirement earnings and expenses will be, and exactly what taxes and inflation are going to be during your retirement years. I will calculate precisely how much you can withdraw each month from your savings account without your having to worry about running out of money.

There are also some tax disadvantages, but they are minor compared to the initial disadvantage.

3. Interest Only

This one is pretty straightforward. You put all of your money into a safe, interest-bearing vehicle, such as a CD or savings account. Every month (or quarter), you pull out the interest earned.

Advantages: This strategy is incredibly simple. This plan keeps your spending under control since you are not pulling out randomly determined sums of money. Most importantly, as long as you stick with it, you cannot outlive your money.

Disadvantages: Every dollar withdrawn is taxed as income earned. That can really eat into the net income you have to spend.

In theory this is a great plan: You live off of your dividends and interest while leaving your nest egg (principal) alone to continue generating income. But the catch is that in order to do that for 30 years or more you need a really big nest egg; think minimum of $1 million. Why so much? It's because of those unknowns you have to factor in: Rising taxes, inflation and unexpected health care expenses.

In the late 1980s I had clients retiring on $400,000 in safe vehicles. They were earning 7% interest and they started pulling out interest only so that their $400,000 would never decrease. They had an annual income of about $28,000, and each of them was on Social Security. They were in pretty good shape.

When the interest rates decreased in the 1990s, theirs dropped to about 5%. Their $28,000 annual income was now $20,000. That was quite a hit, especially when you factor in the inflation and the higher cost of living they now had to pay. They were very frugal with their expenses, but they still had to start dipping into that principal by just a few thousand per year.

In the last couple of years, their interest rates have dropped to 2% and the principal is under $300,000. There is no way they can live off $7,000 per year, especially after another decade of inflation (even though inflation has been pretty low.) They have no choice but to start pulling most of their income from their savings. They are both in their mid-80s and healthy. But they are not sure whether their money will last as long as they do.

(Continues...)

Excerpted from Fear Free Retirementby Richard E. Gearhart Sheilah Bower Steve Lawson Copyright © 2011 by Richard E. Gearhart. Excerpted by permission of AuthorHouse. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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