Report Says Plan Participants Want Income Estimates

A survey taken by the Insured Retirement Institute asked if participants would like their benefit statements to contain an estimate of the income their account balances would produce at retirement. The answer, of course, was yes. The US Department of Labor is planning to propose a rule that would require that defined contribution plans (those in which you have an account balance rather than a promised benefit) contain such estimates, and this survey apparently shows support for the idea.

There are several points to make here. One is the familiar point that when you read a survey, it helps to know who’s asking. The Insured Retirement Institute is an organization that represents sellers of annuities. Nothing wrong with that, but when a group that likes annuities asks if people would like to know what annuity income their account will buy, perhaps we can be a little skeptical.

But a second point is that there is little guidance given to retirement plan participants as to whether they are saving enough for retirement and how their retirement account balances will replace their working income after retirement. With a defined benefit plan, you know what the retirement income will be; but with the steep decline in such plans, most workers will have to determine what kind of retirement they will have based on a lump sum in their retirement accounts. That will be very difficult for most of them.

The survey adds that people like the idea of using online retirement calculators. These calculators can be very helpful, but their value depends on the value of the information inputted. And, the quality of online calculators varies widely. And, further, there could be a tendency to rely too much on the estimates provided, as if they were guaranteed amounts, which they are not.

So, yes, the idea of providing estimates of retirement income is a good one, and online calculators can also be helpful. But what is really needed is financial planning advice for individuals with retirement accounts based on their specific circumstances. This might result in buying an annuity or in some other investment vehicle. Provide education; provide it on an impartial basis, without trying to sell one particular type of asset; and encourage retirement plan sponsors to offer low cost financial and retirement planning advice to participants.

Planning Retirement With 401(k) Plans

Another difference between the more traditional defined benefit plans and today’s more prevalent defined contribution plans, including 401(k) plans, is that with the latter you approach retirement with a lump sum of money, and you have to determine how you will withdraw it. In effect, you need to make some kind of a guess as to how you will make the lump sum last throughout your retirement years. By contrast, with a defined benefit pension plan, you receive a monthly benefit, which you know you will receive for the rest of your life. That kind of benefit makes planning easier. But fewer people have such plans, as compared to the prior generation. What to do?

First, you need to avoid the “illusion” that because you have a large retirement account, you need not worry about the amount you withdraw. This lump sum must last your remaining lifetime, and perhaps that of your spouse. A large lump sum might permit only a small annual distribution, if it is to last a lifetime.

How do you determine how much you can withdraw? Unfortunately, while there are some guidelines, like the oft-quoted 4% per year, there is not enough guidance to deal with each individual’s specific circumstances. It can’t be that 4% is the right number for everyone at all times. What’s needed is more retirement planning tools and better access to skilled advice. There are many financial planners, but many of them earn a living by selling products, and that might color their advice. Just my opinion, but I believe that financial planners who charge a flat fee are a better source of advice. Again, every general statement is subject to many exceptions.

It’s apparent that people are retiring without a clear idea of what to do next, and this can result in financial problems. What’s needed is more discussion and concrete planning as to how those facing retirement can get reliable advice on how to budget and plan for a secure retirement.

The Perils of Going It Alone

An article on the website describes a problem facing baby boomers who are about to retire. Many of them have participated in employer-sponsored retirement plans, and in those plans they have chosen their investments from a menu of funds selected by the plan’s administrator. But if they retire and roll over their retirement account balances to an IRA, they’re on their own. They must choose from the vast universe of investment opportunities. They might get advice, but they will generally pay for it, and often at a higher cost than was charged in the retirement plan. Many boomers are investment-savvy, but most aren’t. A few serious mistakes can make a big difference in retirement. Employers would be well-advised to allow retirees to keep their retirement funds in the plan. This might require some changes in how funds are permitted to be distributed, but a little more complexity in the plan would be a small cost to help retirees maintain what they have built up over their careers.

A Lesson From The Future

Not exactly, but a recent article in an insurance industry publication, The National Underwriter, tells the results of a survey taken among older individuals in end-of-life care. They were asked what they regretted. Here are the top five answers:

5. I wish I had let myself be happier.
4. I wish I had stayed in touch with my friends.
3. I wish I’d had the courage to express my feelings.
2. I wish I hadn’t worked so hard.
1. I wish I’d had the courage to live a life true to myself, not the life others expected of me.

Charitable IRA Provision Extended For Two Weeks

Congress has finally passed a bill, introduced in 2013,┬áto extend certain credits and other tax provisions. Among the provisions it extends is the ability to make transfers of IRA funds to certain (mostly public) charities, up to $100,000, provided the IRA owner has reached age 70 1/2. It’s a provision limited in scope and usefulness, but in any case it was only extended to the end of 2014, at which point it expires again, perhaps to be resurrected again next year, Tax provisions that fall in and out of the law are really useless, because they don’t permit taxpayers to engage in careful planning. Either make it a permanent part of the law, or drop it entirely.

An Argument for Defined Benefit Pension Plans

An article from the Callan Investments Institute argues in favor of defined benefit pension plans, which are surely out of favor these days. Those points are worth considering:
1. DB plans are cost effective and reliable in delivering retirement income security-mostly because they generally have professional management, rather than relying on participants to make investment decisions.
2. DB plans in the public sector are underfunded because politicians chose to defer their obligations to do so, not because of any inherent problems in the type of plan.
3. Even if DB plans are doing well in their investment returns, that is not a basis for increasing benefits, because over the long run, returns will be average. That is, no one can achieve above average returns indefinitely.
4. DB plan funding surpluses and deficits are expected over the normal cycle of investment returns.
5. DB plans that have an actuarially sound funding policy will achieve 100% funding over time. A sound funding policy has three elements- adequate funding, intergenerational equity and cost stability.

Is There a Second Act in Life?

Perhaps there is, but it takes some planning to achieve and enjoy it. I’m not an expert on this topic, although there appear to be many people who claim to be such. Second act activities can be rewarding, but you need to be careful to avoid just becoming the way someone else makes money from your labor. Here are some resources that I’ve noticed: a book called Second Act Careers by Nancy Collamer, and these websites:;;;; Check these sites and make your own decisions.

Mistakes Too Many People Make With IRAs

So many people have IRAs, whether because they have set them up for annual contributions or used them for rollovers from employer retirement plans; and so many banks and mutual fund companies attempt to administer them; that it is no surprise that errors occur:

Here, based on an article on, are the top 5: 1. Outdated beneficiary forms, which are not changed after a divorce or death, or a change in the overall estate plan. 2. Naming your estate as the IRA beneficiary, which shortens the period over which distributions must be taken from IRAs. 3. Naming a child as the beneficiary without the control that a trust can provide over spending the IRA, particularly for children who have a “problem” with money. 4. Naming a minor child as the IRA beneficiary without naming a guardian to hold the IRA distributions on behalf of the minor. 5. Losing the beneficiary designation form and relying upon the IRA provider having a copy, which doesn’t always happen.

IRAs offer many tax and financial advantages, but some thought is required as to how they will work when beneficiaries become entitled to them.

How to Have Enough Money for the Rest of your Life

Apart from marrying a very wealthy person, or correctly guessing the winning lottery numbers, there are some helpful ways to ensure that you will be likely to have enough to live on in your retirement years:

Get a realistic estimate of how long you’re going to live. Try for example. This will give you an idea of how long your money must last.

Next, consider the 4% rule of thumb: you can reasonably expect to be able to withdraw 4% of your retirement savings each year. If you’re likely to live longer than a normal life expectancy, maybe less than 4%. There are different opinions on that number as being an appropriate one.

Have some flexibility in your withdrawals. If investment values are down, try to restrain your spending.

Review the allocation of your investments among the various categories, to make sure you have the proper balance for your age and risk aversion.

Keep your accounts simple- avoid having a large number of accounts. you can usually cover all investment categories with just a half dozen or so funds.

Consider retiring later. A statistic, for what it’s worth, indicates that waiting until age 70 will give you a very high percentage likelihood of success in stretching out your retirement savings, while retirement at 62 reduces it significantly.

Of course, the golden rule: spend less, save more.

The Retirement Transition Process

Much has been written about the process of transitioning from the daily working world to the world of retirement. Of course, these two worlds can overlap, as many people continue to work after they have begun the retirement process. But there are some dividing lines, and things to do as you cross those lines:

First is health, as it should be. When you reach age 65, Medicare will send you birthday wishes and advise you of tests and vaccinations to which you are entitled under Medicare coverage. Things like pneumonia and shingles shots, a physical examination, colonoscopy, etc. Review this list and check off the items as you complete them.

Second is health insurance, which is vitally important. If you sign up for both parts of Medicare, you will still need supplemental insurance. Most people will benefit from assistance from health insurance/Medicare professionals in making these choices.

Third, consider changes in investments. As you get older, how should your mix of investments change? You might decide to have a more conservative lineup. Again, you’ll probably need professional help.

Fourth, consider your retirement income. When should you take Social Security? A very complicated question. When should you and when must you start taking distributions from retirement plans and IRAs? There is no answer that covers everyone.

Fifth, is your estate plan a sensible one, and do you have documents to carry it out- will, power of attorney, healthcare directive, among others? See a lawyer, don’t buy a kit, which rarely works out the way you think.

Finally, decide what kinds of activities you will pursue in retirement: travel, part-time work, hobbies, new kinds of work. Find something to do.