Questions You Must Ask Before Buying An Annuity-Walter Updegrave

Bloomberg— Getty Images Senator Elizabeth Warren

When choosing an annuity, simpler is usually better.

Annuities, particularly certain types, can play a legitimate role in creating retirement income. But given the potential conflicts of interest outlined in Senator Elizabeth Warren’s recent report on dubious annuity sales tactics, it’s also clear that investors considering an annuity need to take care to assure they’re buying an investment that benefits them as much as the person selling it. Here are three questions that can help you determine whether you’re getting an investment you really need at a reasonable price.
1. How does this annuity work and what, exactly, will it do for me? Annuities come in many varieties, so it’s important you understand what benefit the annuity you’re considering is designed to provide and how it provides it. Immediate annuities and longevity annuities are relatively straightforward. You hand over a lump sum to an insurer in return for the insurer’s promise to pay you guaranteed monthly payments for life that start at once (immediate annuity) or at some point in the future (longevity annuity). The insurer provides this benefit by pooling your investment with that of other investors and distributing payments from that pool over time. Even should the money run out, however, the insurer is on the hook for the guaranteed payments. If the insurer can’t meet its obligations, a state insurance guaranty association serves as a backstop.
Other annuities are more complicated. Variable annuities, for example, can also provide guaranteed lifetime income, but they often do so with something called a GLWB, or guaranteed lifetime withdraw benefit rider. The initial payment you receive with this arrangement is typically smaller than what you would receive with an immediate annuity, but the idea is that you also get to invest in mutual fund-like “subaccounts” that can boost the size of the payment you receive over time. Whether your payment rises, however, depends on, among other things, how the subaccounts fare over time.

At the top of the complexity scale are indexed annuities (also known as equity-indexed annuities and fixed index annuities). An indexed annuity’s return is typically tied to a market benchmark like the Standard & Poor’s 500, although they also provide a minimum guaranteed return, say, 1% to 2% these days. The idea is that you have potential for stock market upside but protection against loss. Indexed annuities can also generate regular income, either through fixed payments as with an immediate annuity or payments tied to investment performance. Where things can really get complicated is that these annuities use arcane methods to calculate their gains (daily average, monthly point-to-point, annual point-to-point) and typically impose spreads, participation rates or caps that limit the share of the market’s return you receive.
I’m not saying you should automatically pass on investments that are more complex. But the more complicated an investment is, generally the harder it is to compare to other investments, the tougher it is to assess how it will perform and ultimately the harder it is to determine whether it’s appropriate for you. Simpler is usually better.
2. What are the downsides? To determine whether any investment is right for you, you’ve got to know not just its pros, but its cons. And that’s especially true of annuities, where the downsides can be significant.
With immediate and longevity annuities, the major downside is that if you die shortly after payments begin (or even before they begin in the case of longevity annuities), you’ll have invested some of your retirement savings and received little, or even nothing, in return. That’s why you would usually want to devote only a portion of your assets to these types of annuities, leaving plenty of other savings for assets such as stock and bond funds that can provide liquidity and long-term capital growth.
With other annuities the cons may not be so apparent. For example, an indexed annuity with its upside potential and loss protection and may seem like all gain and no pain. But because of the limits features like participation rates and caps place on returns, the value of your annuity may grow much more slowly over the long run than had you simply put some of your money in cash and/or short-term bond funds for security and the rest in low-cost stock index funds. The same goes for variable annuities with payment riders that are supposed to provide a growing income stream, except that it’s the insurance and investment costs that may limit growth rather than caps and participation rates.
Before you buy any annuity, you should insist that the salesperson or adviser show you not just the rosy outcomes, but demonstrate in detail the worst-case scenarios as well.
3. What costs and fees will I pay? Things can get tricky here because most annuities don’t break out operating fees and expenses. The exception is variable annuities, where a litany of fees (the mortality and expenses charge, annual investment fees and the cost of riders and options) that can total upwards of 3% annually are disclosed in the prospectus. But you shouldn’t have to wade through a 300-page prospectus to find them. Ask the salesperson to list each separately in writing and total them up.
Other annuities also have costs, but as with CDs and savings accounts, they’re not explicitly disclosed. In the case of immediate annuities and longevity annuities, you can get a sense of whether one annuity’s costs are higher than another’s by comparing the size of the monthly lifetime payments each makes for a given investment (although you’ll also want to consider an insurer’s financial strength rating rather than just pick the one with the highest payout).
There’s one other charge that can be helpful in assessing fees and expenses: the surrender charge. With the exception of immediate and longevity annuities, most annuities levy a penalty for early withdrawals known as the surrender charge. These surrender charges typically start at 7% to 8% and decline gradually until they disappear after eight or so years (although many annuities allow you to withdraw up to 10% of your investment each year penalty free). Some indexed annuities, however, have surrender charges that can start as high as 20% and take more than 15 years to expire. Generally, the higher the surrender charges and the longer they run, the more of your investment is being eaten up by fees and expenses.
Another important cost, sales commissions, also typically aren’t disclosed, but that doesn’t mean you shouldn’t ask how much the salesperson will earn if you buy an annuity. If nothing else, you might be able to get a sense of whether a difference in commissions may be a factor in why a salesperson is recommending an annuity instead of another product, one type of annuity vs. another or even one company’s annuity rather than a competitor’s. I’d also ask whether the salesperson stands to receive any of the kinds of non-cash compensation—trips, golf outings, tickets to sports events, etc.—described in the Warren report.
If the salesperson balks at providing such information—or gives you a line that suggests none of your money goes toward commissions or marketing expenses—I’d move on to someone willing to be more upfront where your investment dollars are going.

Culled from Money

10 Ways the Fed’s Looming Rate Hike Touches You The Fiscal Times By Janna Herron

Expectations that the Federal Reserve will hike interest rates in December have only grown since October’s strong jobs report last week.  CME Group’s FedWatch Tool puts the possibility at nearly 70 percent.
But aside from the stock market’s reaction and the high-level discussion among economists about whether the timing is right, what exactly does an increase in the federal funds rate—a common benchmark for loans—mean for your wallet?
“The fed funds rate is effectively the price of money,” says Greg McBride, chief financial analyst at Bankrate. “And when the price of money goes up, it ripples out to every financial product one way or another.”

Here are 10 ways you could feel the effects of what Fed Chair Janet Yellen and her colleagues might do in December and beyond:
No. 1 Buying (or refinancing) a house
Rates on adjustable-rate mortgages will react fast to any rise in the fed funds rates. That’s because the rates on ARMS typically are tied to the prime rate or LIBOR, both of which closely track the fed rate.

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But rates on the most common mortgage—the 30-year fixed—will rise gradually. That rate follows the yield on the 10-year Treasury note, which usually moves in the same direction as the fed funds rate, but not in lockstep. The same goes for the 15-year fixed home loan, a popular refinance choice.
Consistent rate hikes over time by the Fed could eventually price some buyers out of the market. The subsequent reduced demand could slow home price growth, says Jim Gaines, chief economist at Texas A&M University’s Real Estate Center.
No. 2 Borrowing from your house
Rates on existing home equity loans are fixed, so they won’t be affected by a rate hike. But if you’re shopping for a new equity loan, you will see rates track the increase of the 10-year Treasury yield, which follows the direction of the fed rate, but at a slower pace.
If you have a home equity line of credit, or HELOC, get ready for higher rates. Most HELOCs track the prime rate, which is also tied to the fed funds rate. The increase will be almost immediate, taking effect within 30 days. To help yourself, ask your lender to fix the interest rate on the amount you have already borrowed on the HELOC. The rate increase would then only affect any future borrowing.
No. 3 Charging to your credit cards

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Most interest rates on credit cards are variable and are often tied to the prime rate, just like HELOCs. That means the rate on your credit card will increase shortly after the Fed raises rates. However, the higher interest rate only applies to purchases made after the increase, says John Ulzheimer, a credit expert formerly with FICO and Equifax. Any previous debt is subject to the old rate. Also, consumers can avoid paying any interest at all on their credit card if they pay off their balance every month. That way, it doesn’t matter what the Fed does in December.
No. 4 Saving for the future
Rates on certificates of deposits, or CDS, money market accounts and savings accounts are highly correlated with the fed funds rate and move closely with it. If the Fed raises rates, that means better returns for savers. But there’s a long way to go before rates hit the 5 percent glory days, says Patrick Huey, a certified financial planner in Portland Oregon. “Despite all the hype, the next few years will still be difficult on depositors looking for yield,” he says.
No. 5 Investing in stocks

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If interest rates go up, yields on Treasuries and other bonds will increase and attract more investors into those markets and out of the stock market, says Ozlem Yaylaci, senior economist at IHS Global Insight. Public companies also will face higher borrowing costs after the Fed increases rates that could eat into profits and drive stock prices lower.
No. 6 Investing in Treasuries
Returns on bonds are going to get better. Yields on short-term Treasury bills will go up in tandem with any rise in the federal funds rate. Its effect on medium- to longer-term notes and bonds will be more muted, but will generally rise as the Federal Reserve implements more hikes down the road. That will attract more investors into Treasuries, driving their prices down.
“The one thing that may happen is that people invested in bonds will see a downtick in their values,” says Allan Katz, president of Comprehensive Wealth Management Group in Staten Island, New York. “This may scare them knowing there will be future hikes, and so they may look for other fixed income alternatives more than they have in the past.”
No. 7 Traveling abroad
Maybe it’s time to book that European vacation. When the Federal Reserve raises rates, foreign investment flows into the U.S., which strengthens the dollar against other currencies. That means U.S. travelers can buy more with their greenbacks when they are abroad.
No. 8 Retiring
Rates on annuities will get a small boost from rate hikes. Annuities are a good option for retirees to guarantee a safe stream of income. But the monthly income from a fixed-rate annuity is based on the interest rate that was locked in when the retiree bought the annuity, so higher rates are better.
No. 9 Repaying College Loans
Many private student loans have variable rates, many of which are tied to the prime rate. When the Fed raises rates, the prime rate also goes, increasing your monthly payment. How often your interest rate is adjusted depends on the loan terms.
No. 10 Buying a car

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There’s no direct correlation between the fed funds rate and auto loan rates, but they will eventually follow the general interest-rate environment, says McBride. Still, auto loan rates remain near historic lows and will continue to stay competitive, he says.

“Movements in auto loan rates have an imperceptible impact on affordability,” McBride say. “A quarter-point interest rate move is $3 more a month on an auto loan. No one will downside from an SUV to a compact car because of it.”

Culled from fiscaltimes

Social Security changes will hit couples, divorced women hard-By Robert Powell

Millions will lose money without this key claiming strategy

If you’re married...
The impact on planning for couples is nuanced, according to Joe Elsasser, founder of Social Security Timing. There are now three sets of rules:
1. For people born on or before May 1, 1950
People born on or before May 1, 1950 (those who turn 66 for Social Security purposes in April 2016) have access to voluntary suspension that allows auxiliary beneficiaries (the spouse of a retired worker and the children of a retired worker) to claim as long as the request for voluntary suspension occurs on or before April 30, 2016, and can file a restricted application at any time between ages 66 and 70.
Restricted application: With a restricted application, an individual who was eligible for both a spousal benefit based on the work record of a spouse and a retirement benefit based on his or her own work could choose to take only a spousal benefit at full retirement age. This allowed his or her own benefits to accumulate 8%-a-year delayed retirement credits, and then they could switch to their own larger benefits at any point in the future up to and including age 70. The new law phases out this option.
Voluntary suspension: Under the existing (old) law, the higher wage earner in a couple could file for Social Security benefits and then immediately request those benefits be suspended. The checks to the higher wage earner would stop, which allowed for their benefits to grow 8% a year. While the benefit was suspended, the lower wage earner spouse could collect a spousal benefit. Under the new law, only people who suspended their benefits in the past or within the first 180 days after enactment of the new bill will be covered under the old rules, and they will continue to fall under the old rules until they reach age 70 or un-suspend their benefits.
2. For people born on or after May 2, 1950, but before Jan. 2, 1954
People born on or after May 2, 1950 but before Jan. 2, 1954 can still do a restricted application under the new law. However, voluntary suspension will also suspend the benefits of other auxiliary beneficiaries, including spouses and children, and under this change to the law, the spouse benefiting cannot receive spousal excess while a voluntary suspension is in effect. (The spousal excess is the difference between one half of the higher wage earner’s full retirement benefit and the lower wage earner’s spouse’s full retirement benefit.)
3. For people born on or after Jan. 2, 1954
For these people: Under the new law, voluntary suspension suspends the benefits of the spouse and children, and the lower wage earner cannot receive spousal excess. There is also no option for a restricted application.
Questions and answers
Question: At 66 years of age, my full retirement age (FRA), I filed for Social security benefits and immediately suspended. My wife, also 66 (her FRA), filed for spousal benefits only on my account. We initiated this in August, 2014 and have received spousal benefits each month since September, 2014. Now, I am at a complete loss on what to do next because of the new law. We are both working full time and our intent is to maximize our Social Security benefits and start taking it at 70. How do we do this under the new law? —Howard
Answer: You will squeak under the wire for the effective dates of the new Social Security rules, according to Andy Landis, founder of Thinking Retirement, author of Social Security, The Inside Story and a MarketWatch RetireMentor.
The file-and-suspend changes will affect only new requests to suspend, starting six months from bill being signed into law, so there’s no problem with your already-requested suspension, Landis said. And the changes to spousal benefits affect only people born Jan. 2, 1954 and later, so your wife’s benefits also will not change.
“In essence, you don’t have to do anything; it looks like you and your wife fall safely under the old rules,” Landis said. “Just to be sure, give the Social Security Administration a few months to issue instructions to their employees and check with them.”
Question: I read that the new budget law will eliminate file-and-suspend, but it will not affect couples who are over 62 in 2015. I am 65 and my wife 63 in 2015. I was going to suspend my benefits and take spousal benefits in 2018 when wife is at FRA. Is this strategy still available? —Steve
Answer: It will depend on your birthday, Steve. You have only 180 days from the signing of the bill to file and suspend and you need to be 66 to do this, according to Larry Kotlikoff, co-author of Get What’s Yours — the Secrets to Maxing Out Your Social Security Benefits.
“So if you are within 180 days of your birthday, you’re OK,” he said. “Otherwise, no.”
You can use software created by Kotlikoff to confirm your best move. Maximize My Social Security, which costs $40, will be updated to reflect changes in the Social Security law by Nov. 20.
If you’re divorced...

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The impact for divorced people is very similar to that for those who are married, according to Elsasser. The important timelines are for those born before Jan. 2, 1954 who still have access to the restricted application and those born after, who do not.
Question: I will be 66 in October 2016. I have been divorced more than 10 years and never remarried. I was thinking about filing on my ex-spouse’s Social Security record, receive half her benefit, and suspend mine until I am older. In your column, (Read: Millions of Americans just lost a key Social Security strategy) Mike Piper is quoted as saying “But for people who will be 62 or older at the end of 2015, the restricted-application strategy is still available.” That sounds like I might still be able to draw on my ex-spouse’s Social Security record next year and receive half her benefit and let mine grow. Then further down the story it said:
You will no longer be able to receive benefits on anybody else’s work record while your benefits are suspended.
Nobody else will be able to receive benefits on your work record while your benefits are suspended.
Does that still mean I am out of luck or that I cannot draw on her Social Security record if she suspends? —Jon
Answer: Jon will be able to file a restricted application at his full retirement age to receive just spousal benefits on his ex-spouse’s work record while allowing his own retirement benefit to grow, said Piper, author of Social Security Made Simple: Social Security Retirement Benefits and Related Planning Topics Explained in 100 Pages or Less.
Of note, Jon should not file and suspend his own retirement benefits, Piper said. “The whole point of filing a restricted application is to collect something while not filing for one’s own retirement benefit,” he said. “However, Jon is right that if his ex-spouse suspends her benefit for some reason (after the closing of the 180-day window), his benefit as an ex-spouse would be cut off while her benefit is suspended.”
But fortunately for Jon, Piper noted, the reasons for suspending are significantly reduced as a result of the new rules, so it’s somewhat unlikely that she would suspend her own benefit.
If you are a widow or widower...
Planning for widows and widowers was not affected at all, according to Elsasser. Widows and widowers will continue to have the opportunity to restrict an application to only widow benefits or only retirement benefits, and later switch to the other benefit.
Question: I will be 64 at the end of 2015. I am not retired yet, but I planned on claiming my ex-husband’s Social Security when I do retire (probably when I’m around 66 years-old) and letting my Social Security benefits grow until I’m 70. Is that no longer a possibility with the new law?
Answer: You can let your benefits grow, Kotlikoff said.
If you are single...
The impact on planning for singles is very simple, said Elsasser.

If you were born on or before May 1, 1950 and the optimal strategy for you would be to delay benefits past your full retirement age, you should file and suspend as soon as you are eligible to do so — either immediately or as soon as you reach FRA. The last date to be able to do so will be April 30, 2016.

Culled from marketwatch

1 Big Risk to Your Happy Retirement

Here's what you can do to make sure your retirement savings lasts as long as you do.

Photo: Flickr user Nancy.

The "4% rule" is a popular guideline for retirees to make sure they never run out of money. However, since the idea of the 4% rule was first published more than 20 years ago, times have changed -- people are living longer, and interest rates are low -- so it's not unheard of for people to deplete their nest eggs, even when withdrawing at the 4% rate. The biggest risk to a long and happy retirement is outliving your savings, so here's what can go wrong, and what you can do about it.
The assumptions of the 4% rule
Basically, the 4% rule says that if you withdraw 4% of your retirement savings during your first year of retirement, and then adjust this amount upward for inflation in subsequent years, your nest egg should provide 30 years of worry-free retirement.
This assumes a few things. While the numbers can vary depending on who you ask, the rule assumes that 50%-75% of your portfolio is in equities, and the balance is in fixed-income assets, like bond funds. A 60/40 mix seems to be a popular recommendation based on the various literature published by financial institutions. Based on this allocation, it is also assumed that your portfolio's long-term annualized returns will be in the 6% to 7% range, which is reflective of the historical average of this stock/bond allocation.
The rule makes sense, at least in principle. After all, if your portfolio earns 6% in a given year, and you only withdraw 4%, your nest egg should actually grow slightly over time.
What could go wrong?
Unfortunately, there are some circumstances beyond your control that could hurt your chances of your money lasting longer than you do. Here are four of the biggest threats to the 4% rule working out in your favor.
1. Inflation could be higher than you expectHistorically, inflation has averaged about 3% per year, which means the 4% rule would work just fine. After all, a 4% withdrawal and 3% inflationary adjustment would be offset by a 7% annual return. However, there have been periods of high inflation in the past. For example, consider the inflation in the U.S. from 1974 to 1981. Being forced to increase your withdrawal rate this quickly could deplete your savings much faster than you anticipate.

Year	1974	1975	1976	1977	1978	1979	1980	1981
Inflation rate	11%	9.1%	5.8%	6.5%	7.6%	11.3%	13.5%	10.3%

2. Market performance could be poorAs I mentioned, the 4% rule assumes annual returns of 6% to 7% per year, but there have been time periods where this doesn't occur. In fact, from 2000 to 2010, the S&P 500 actually produced a negative total return. If you had withdrawn 4% of your nest egg each year during that decade, more than 48% of your nest egg would be gone after accounting for market performance -- and that doesn't even take inflation into account.

3. Interest rates can remain lowInterest rates are at historic lows, and this can drag down the returns from the fixed-income portion of your portfolio. A 2013 research paper found that historical interest rates result in only a 6% chance that the 4% rule would fail to last for 30 years. Using the 2013 historically low interest rates (which are still low today), the probability of failure goes dramatically to 57%.
4. You could live longer than you planEven if the 4% rule works perfectly and makes your money last for 30 years, there's a growing chance that your retirement will last even longer than that. The average 65-year old will live another 20 years, and some live much longer – more people are living into their 90s, or even 100s, than ever before.
How to make sure you don't outlive your money
Fortunately, there are some steps you can take to make sure you don't outlive your money. Just to name a few:

• Save as much as possible: This may sound like the most obvious solution, and it is, but if you build up enough of a nest egg that you can withdraw less (say, 3%) of your savings each year, it can dramatically increase the chances of your money lasting.
• Keep more of your money in stocks: While stocks can be more volatile, they do produce better returns over the long run, so boosting your exposure to equities can improve your chances of strong long-term returns. Since 1928, the S&P 500 has produced average total returns of 11.5%, while 10-year Treasury bonds have averaged 5.3%. Using these numbers, a 50/50 mix would average 8.4% returns, while a 70/30 mix would average 9.6%.
• Consider a deferred-income annuity: A deferred income annuity is essentially a form of insurance against outliving your money. Basically, you give an institution a sum of money now, and they agree to pay you a steady stream of income beginning at a later date. Using a current annuity calculator, a 55-year-old man who buys a $100,000 annuity that will start paying at age 75 can expect an annual income stream of $23,200 from that age for the rest of his life.

The Foolish bottom line
Nobody wants to save and invest for an entire lifetime just to run out of money when it's needed most. Fortunately, if you know the risks, you can plan ahead and take steps to ensure that your money will last as long as you do -- even if you live to 100 or beyond.

The $15,978 Social Security bonus most retirees completely overlook
If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known “Social Security secrets” could help ensure a boost in your retirement income. In fact, one MarketWatch reporter argues that if more Americans knew about this, the government would have to shell out an extra $10 billion annually. For example: one easy, 17-minute trick could pay you as much as $15,978 more... each year! Once you learn how to take advantage of all these loopholes, we think you could retire confidently with the peace of mind we're all after.

Culled from Motley fool

How executives can minimize the retirement tax hit-By Liz Moyer

Employees who will cash in stock awards and deferred compensation can reduce tax burden by planning ahead

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For many highly paid executives, retirement isn’t just about capping off a career, or figuring out what they are going to do for the next phase of their lives. It’s also about juggling large payouts from the stock awards and deferred compensation they may have accumulated over the years.

Executives can minimize the tax hit and smooth out income from such corporate perks in the early years of retirement, financial planners say, but it is important that they start the process one to two years before they plan to leave. Among other things, advisers recommend that executives take an inventory of what their short-term cash-flow needs will be in retirement and review company policies on how and when they can draw down deferred pay.
“For many executives, the year they retire is their biggest salary ever because of all the lump-sum payments” their plans mandate, says Lisa Brown, a financial adviser at Brightworth LLC in Atlanta who works with retiring executives. “Map out your plan.”
Take a hypothetical executive with a $400,000 salary. In 2015, she exercises $40,000 of stock options and defers $50,000 of compensation to her company’s nonqualified deferred-compensation plan. Her adjusted gross income for the year is $416,000, which also takes into account investment gains in her personal brokerage account.
She sets her retirement date for December 2016. At that time, according to her company plan, she’ll trigger $600,000 of additional income for the year in the form of lump-sum payments from the deferred-compensation plan and accumulated company stock awards, boosting her adjusted gross income for the year she retires to more than $1 million.
By delaying the lump-sum payments until a few years into her retirement, when she is no longer drawing a salary, she could prevent her income from jumping so much in that first retirement year, says Ms. Brown.
To defer or not?
Executives should consider all of the short-term cash-flow needs that will come up in the early years of retirement, including any money they may need to pay the taxes on stock-option exercises and to fund health and insurance needs, says Cathy Schnaubelt, a senior wealth strategist in Houston for Atlanta-based Atlantic Trust.
Those who have taken advantage of a nonqualified deferred-compensation plan in addition to their company’s 401(k) may have a big decision to make. The nonqualified plans allow executives to defer part of their annual bonuses or other compensation to a point in the future, at which time it becomes taxable. Executives typically can elect to take this accumulated pay as a lump sum at retirement or opt instead to take payments starting five to 10 years after retirement and extending over time, essentially setting up an annuity-like income stream well into their retirement.
Most plans require this election to be made at least 12 months in advance of an executive’s retirement date, and it can’t be changed once it’s made.
Executives who plan to move to a no-income-tax state such as Florida after retirement may be able to eliminate state taxes on deferred compensation by pushing out payments from nonqualified plans, says Andrew Liazos, an executive compensation attorney in Boston for McDermott Will & Emery LLP.

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Those who have to take deferred compensation as an immediate lump sum may want to consider charitable giving through a donor-advised fund, says Scott Kaplowitch, an accountant at Edelstein & Co. in Boston, who recently helped a client set up such a vehicle with a $10 million lump-sum deferred-compensation payment. A donor-advised fund allows the donor to take an immediate tax deduction on the amount invested and decide over the course of years which charities will receive the funds. It also sets up the retiree’s charitable giving for the long term, rather than having to factor annual giving amounts into retirement cash-flow projections, he says.
The fine print
Some executives may find that delaying retirement into the next calendar year is beneficial, Ms. Brown of Brightworth says. It gives them another chance to make the maximum annual allowable contribution to their 401(k) plan and push out payments of vested stock and nonqualified-plan assets another year, which could be helpful if, say, the executive expects a financial windfall unrelated to work to boost his or her income.
Many advisers suggest executives delay taking Social Security payments for as long as possible, setting them up to start at age 70 to avoid adding to income in a year when large deferred-compensation payments may have to be taken.
As far as company stock awards go, it pays to review your company’s policies. Some plans say those who retire earlier than a set time frame forfeit any unvested awards. Some plans require employees to meet age and years-of-service hurdles before being allowed to get all their deferred compensation—the standard is between 50 and 60 years old and 10 years of service. Some plans mandate an immediate lump-sum payout of vested stock for those who retire before meeting those requirements.
Getty Images/iStockphoto
Check your plan to find out the dates that stock options have to be exercised or forfeited, says McDermott Will & Emery’s Mr. Liazos.

When people are planning to leave a job, “it’s never a bad idea for an employee to ask for an accounting of his or her benefits and compensation” he says, so these deadlines won’t be missed. “It isn’t uncommon for errors to be found. At least you can correct the errors while you’re still employed.”

Culled from The Wall Street Journal

6 ways to avoid outliving your retirement nest egg-By Kathy Kristof

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It may be the biggest worry of retirement: How do you ensure that you don't run out of cash before you run out of breath? The easy answer is to save early and often and build up an impregnable stockpile of cash. If you've missed that memo, however, you can still vastly increase the chance that your nest egg will last at least as long as you do by taking these six steps.

1. Make a Plan

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Just 48% of Americans have attempted to figure out how much money they should be saving for retirement, according to a 2015 survey by the Employee Benefit Research Institute. Notably, the study found that those who have tried to calculate their retirement needs have more savings and greater confidence in their retirement readiness than those who have neglected to make a plan.
To set your saving target, start by estimating how much income you'll need to replace in retirement (one rule of thumb is 80% of your working income). Factor in how much you spend and save now and which expenses will go up or down or evaporate altogether once you retire. If you plan to pay off your mortgage before retirement, for example, subtract that cost from your projected spending. Include the amount you spend on property taxes and homeowners insurance as well as such basics as food, clothing and entertainment. Keep in mind that you may spend less in some categories, such as dry cleaning and eating out, and more on hobbies and recreation, including travel.
Next, calculate how much you'll have coming in from fixed sources of income, such as Social Security and pensions. If you expect a pension, ask your employer what the amount will be. For an estimate of your Social Security benefits, click on "check your information or benefits" under the "benefits" tab at Retirement Estimator on the site's home page. Any gap between expenses and income will have to be filled by savings. To get an idea of how much you'll need over a 25- or 30-year retirement, plug your data into a retirement savings calculator.

2. Follow the Modified 4% Rule

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If you withdraw no more than 4% of your assets in the first year of retirement and adjust your withdrawals for inflation annually thereafter, your assets should last as long as you do, according to a longstanding benchmark.
One caveat: If you experience big investment losses early in the game, the chance of running out of money soars unless you adjust your withdrawal rate. "It's not a set-it and forget-it thing," says Judith Ward, senior financial planner at T. Rowe Price. "You have to revisit your withdrawal rate every year." The adjustment doesn't need to be drastic, she says. Simply forgoing the inflation adjustment in tough years can make a difference. The good news is that if investment returns are better than expected in any given year, you can adjust upward, too.

3. Work a Little Longer

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Every extra year you stay on the job can add as much as three years to your retirement readiness.
Why? First, for every year you work, you're preserving the savings you would otherwise be using to cover living expenses. Second, working longer can help you delay taking Social Security--and for every year you delay after full retirement age (currently 66), you get an 8% boost in benefits, up to age 70. (Delaying taking your pension beyond the date you're eligible may also boost your pension payment.) Third, you can kick more money into your retirement plan while you work that extra year, and investment returns will continue to build. To improve retirement readiness, "working longer is one of the most significant things you can do," says Ward.

4. Protect Against Long-Term-Care Costs

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You've probably heard that long-term-care expenses can be overwhelming, with the median cost of a nursing home running roughly $80,000 annually, according to Genworth Financial.
That's not a cost the average middle-income family can easily shoulder, and it bolsters the argument for buying some insurance. But long-term-care policies are costly and have restrictions on their use. The best bet is to buy coverage that would defray catastrophic long-term-care costs, such as a prolonged stay in a nursing home, and attempt to self-insure--by earmarking a portion of your savings--for help with incidentals such as shopping and other errands, which the policies typically don't cover. For the coverage you do buy, look to cut costs by reducing the inflation adjustment from, say, 5% to 3%, shortening the benefit period or extending the period before coverage kicks in.
Meanwhile, note that about 80% of the people needing long-term care in the United States live in private homes, receiving the bulk of the help through unpaid assistance from friends and family, according to a report by the Congressional Budget Office. Be good to those people. They may save you a fortune.

5. Buy an Annuity

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For another fixed, guaranteed source of income, consider using some of your savings to buy an immediate annuity.Monthly payments are based on your age (the older you are when you buy, the bigger the payout) and interest rates when you buy. So if you buy an annuity when you're relatively young or when interest rates are at historically low levels, as they are now, you lock in a low monthly payment for life. Currently, a husband and wife who are both 65 and who pay a single $100,000 premium would lock in a $480 monthly payment for the rest of their lives.
To boost the payout, you could stagger your annuity purchases over several years, taking advantage of potentially higher interest rates as well as the higher payouts owing to your older age, or go with a deferred income annuity, in which you pay the premium but defer the payout for several years. The longer you defer, the higher the annual payout.
Be aware that generally if you buy an annuity and are run over by a truck a month later, no residual goes to your heirs. Plus, few annuities are inflation adjusted, so the set monthly payment provides less buying power over time. That said, if you want to use just a portion of your savings to lock in a set monthly payment for life to, say, make sure you always have a fixed source of income to pay a fixed expense, such as your mortgage, an annuity can be a great tool.

6. Use Your Home Equity

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Reverse mortgages have gotten a bad rap for two good reasons. One, they have been used as a last resort by very elderly retirees who are running short of cash, resulting in upfront fees and charges that are excessive for what ends up being a short-term loan. More significantly, some charlatans have encouraged elderly clients to take out reverse mortgages and invest the cash in questionable deals that end up losing the senior's last asset--his or her home equity.
In the right circumstances, however, a reverse mortgage can be a huge benefit, says Anthony Webb, senior research economist at the Center for Retirement Research. These loans, guaranteed by the federal government, allow seni

ors age 62 and older to tap their home equity while remaining in their home; the loan is repaid when they move, sell the house or die. If there's equity left in the home, the owner or heirs can sell the house and repay the loan, keeping the remainder. If there's no equity left, they hand the bank the keys.
6. Use Your Home Equity Part II -- How It Works

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Reverse mortgages are complicated and can be expensive. For instance, on a loan of roughly $250,000, up-front fees can run well over $10,000. Costs include an insurance premium of 0.5% of the loan amount, or 2.5% if you take more than 60% of the proceeds during the first year; you also pay an annual insurance premium of 1.25% of the loan for as long as you have it.
You can take the money as a lump sum, which causes interest charges to accrue on the entire balance immediately; as a line of credit, where you pay interest charges based on when and how much you tap; or as a monthly annuity for the rest of your life. Or you can combine two of these options, getting a small lump sum up front and tapping the remaining balance either as needed or monthly.
To qualify for the loan, you must show that you can pay the property tax and keep homeowner's insurance current; otherwise, you will be required to set aside part of the loan in an escrow account to cover those costs. And you're limited to how much of the proceeds you can take in the first year (generally, no more than 60% of the amount you are eligible to receive). That restriction protects borrowers from using up all of the money in the early years of the loan.
Despite the costs and complexities, the loans can be ideal for retirees who find themselves house-rich but cash-poor. Consider a hypothetical individual we'll call John, who is laid off at 62 from a job paying $80,000 a year. He figures he'll need 80% of his working income, or $5,333 a month, to live on. Between his Social Security benefit (which is reduced 25% to 30% if you claim at 62, the earliest you are eligible, compared with your benefit at full retirement age) and distributions from his retirement savings, he will have only about $4,300 a month, $1,000 a month short of what he needs. By using cash from a reverse mortgage to fill the income gap, he could delay taking Social Security until age 70, at which point his benefit would be 76% higher than at 62. That increased benefit would enable him to live comfortably even if he taps out the money he raised in the reverse mortgage. (To find out how a reverse mortgage could work for you

Culled from kiplinger

You're About to Get Too Expensive for Your Pension Plan-By Suzanne Woolley

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The federal budget deal could speed the long, lingering death of old-fashioned defined-benefit pension plans, in which employers reward years of service by providing a guaranteed stream of income in retirement.

The deal could affect any pre-retiree in a former employer's pension plan by increasing the per-head premiums that plan sponsors must pay to the Pension Benefit Guaranty Corp. If it goes through as written, every person in a plan will get more expensive at the stroke of a pen.

Employers are already deeply concerned about the extent and uncertainty of future pension liabilities and are trying to shed them. The proposed increase in the budget legislation would push even more pension plans to manage costs any way they can, including reducing participant head count, said Alan Glickstein, a senior retirement consultant with Towers Watson.
The budget deal calls for a 22 percent hike, spread out over three years, in flat-rate, single-employer premiums paid to the PBGC, which acts as a backstop to a company's pension liability should the company become insolvent. Those premiums will already have risen from $31 in 2007 to $64 in 2016; by 2019 they will reach $78.

An increasingly common way companies get rid of those liabilities is by offering participants a chance to take their pensions all at once, as lump sums based on the present value of their future benefits. After strong years for such offers in 2013 and 2014, the activity rose dramatically in 2015, said Matt McDaniel, who leads Mercer’s U.S. defined-benefit risk practice.
More lump-sum deals aren't good news for employees, about 40 percent to 60 percent of whom take the deals. Most who take lump sums of less than $50,000 cash those retirement funds out rather than roll them into an IRA, paying income tax and a 10 percent penalty if they aren't at least 59½. While it depends on individual circumstances, it usually makes more financial sense to leave the money in the plan and have it trickle out during retirement.

Perversely, the premium hikes could wind up hurting, not helping, the Pension Benefit Guaranty Corp., because they may not fully offset shrinking head count in pension plans. Benefit consultants are frustrated. "This has nothing to do with pension policy, but is simply a device to raise revenue," said Towers Watson's Glickstein. Higher premiums "would be a factor that causes a move away from these plans, and the whole point of the PBGC is to strengthen the employer pension system, so it's kind of ironic."
A statement by the Erisa Industry Committee, an association that advocates for the employee benefit and compensation interests of large employers, said it was "outraged." Its Oct. 27 statement quoted the committee's president as saying that "even the PBGC’s own analysis does not call for an increase in premiums on single-employer defined benefit plans. PBGC premium increases like the one announced today do nothing to encourage single-employers to continue defined benefit plans or improve benefits for retirees; in fact, the increases only work to further weaken the private retirement system.”
In response to the criticism, an Obama administration official spoke with Bloomberg BNA's Pension & Benefits Daily, telling David Brandolph that with the underfunding in the PBGC's single-employer program, "the proposed premium increases are necessary to ensure that PBGC will be able to pay retiree benefits when pension plans fail. Even with these changes, premiums would likely remain a relatively small percentage of a company's annual pension contribution and a tiny fraction of total compensation costs." The official noted that the increases take effect over three years to allow companies to plan for the new costs.

Culled from Bloomberg.com