Insuring Your Retirement Plan

The essence of the word plan suggests that you need to formulate a strategy ahead of time. According toBusinessDictionary.com a plan is a "Written account of intended future course of action (scheme) aimed at achieving specific goal(s) or objective(s) within a specific timeframe. It explains in detail what needs to be done, when, how, and by whom, and often includes best case, expected case, and worst case scenarios." 

In retirement planning, it means constructing an investment strategy that will help you meet the needs of a time when you no longer want to work - or at least work in the same capacity you have for most of your life. You make assumptions about that period of time and incorporate those into the plan: accumulating wealth, managing debt, staying healthy, paying off mortgages are just a few of the examples of acting to ensure that those assumptions have a chance of coming to fruition.

You approach retirement planning with a certain degree of optimism. Otherwise, why bother? But adulthood can leave us far more pragmatic and because we know things can go wrong - investments can sour, housing can lose value, our health can take a turn for the worse, and debt can be created with the simplest of financial mishaps - and all with unforeseen results.

So we insure. We insure our property against lose, our health against illness and sometimes our investments as well. And we insure our personal contribution to the rest of the people in our lives with life insurance.

Insurance, particularly life insurance is bought when we feel responsible for those around us in a way that we can't really explain. We want these loved ones to continue on without us but to do so without financial hardship that our lives have prevented. We want them to continue on with their lives allowing our children to reach their potential (such as college) and our spouses to be able to live in a way that is supportive of our children.

There is no clear answer to how much is enough. If you were asked how much you would need to live comfortably without ever having to work again, say through a lottery winning, you would probably answer $2-3 million. Yet when we shop for insurance, we often think in terms of a fraction of that.

Insurance is part of a good retirement plan. Too much or the wrong type of insurance can put pressure on your ability to invest enough to get to a comfortable retirement. Not enough, and your family will not be able to survive financially should your income suddenly disappear.

The least expensive insurance is term insurance. It offers the most coverage for the smallest premium but comes with one caveat: it ends after a certain period of time. In other words, if you never use it (and both you and the insurer hope this is what happens), you lose it. Often sold in 20-year increments, it does what it is supposed to do and if you are fortunate, it will never be needed.

Whole life insurance is exactly that: it is a policy that lasts a lifetime provided you keep it long enough and pay the premiums. It builds up a cash value which acts as an investment of sorts and will, after a period of time, begin to pay the premiums for you. But the coverage for the same amount as a term life policy is often much lower and if you want a lot of coverage, the premiums are much higher.

If you are contemplating buying whole life do so only if you are on firm financial footing and can keep your retirement accounts fully funded. Buy term if you are younger, building a family and are likely to face financial hurdles in the coming years. The vast majority of those who buy whole life insurance end up selling the policy after a certain period and if they buy insurance again, they buy term.

Term life insurance is the least expensive when you are young and you can get the most coverage as a result.

You do need to keep two things in mind when buying any insurance product: be truthful and forthcoming with as much information as possible when buying the policy. Although, according to the insurance industry, almost all claims are paid without question, 0.05% of the remaining claims are challenged.  In all cases, be prepared for the fight that might ensue (an example can be found here) if the policy you are using was recently bought. And, always buy from a company whose name you recognize, is rated highly and will be around for the term of the policy.

Paul Petillo is the managing editor of BlueCollarDollar.com and Target2025.com

Retirement Planning for the Next Generation

Most of us are barely able to accumulate enough wealth for own retirement let alone thinking about providing for generations far removed from the event.  But if you could, would you?

The assumptions you make about how much money you will need in retirement are probably the most difficult exercise in the whole of retirement planning. The unknowns are so numerous that simply thinking too much about it gives many people the incentive to simply ignore the question. Taxes and inflation play a role in how much money we will need along with the condition of our health, our portfolios and our living arrangements. Who could possibly guess with any accuracy what those costs will be?

Yet, some of us can with certain investments. If you can wait until you are 70 1/2 years-old to begin taking your distributions from an IRA, and you take only the minimum amount needed, you may be in a position to make that IRA last much longer, across generations. Called a Stretch IRA, the sort of planning can create untold wealth for a child or grandchild.

More on the Stretch IRA from Paul Petillo, managing editor of Target 2025.com

Social Security and Sovereign Wealth Funds

Now that Retirement Planning for the Utterly Confused is widely available and I have completed the footnotes and explained the references that I made throughout the book – something my wife refers to as a “mindbreak from the complexities”, it is time to offer some insights into the world of retirement and associated issues.



Recently, on the Nightly Business Report, a PBS mainstay for almost thirty years, Allan Sloan, Sr. Editor at Large for Fortune offered his comments on fixing the future under funding of Social Security.

He suggested that the United States should “set up a sovereign wealth fund to invest Social Security's cash surpluses. That way, when Social Security takes in less cash than it spends about 10 years from now, we'll have a way to cover the shortfall. Sovereign wealth funds,” he goes on to explain, “are owned by countries, are a very big deal these days as I'm sure you know. They've put about $50 billion into big Wall Street firms that needed capital. They own maybe $3 trillion worth of various stuff but our country doesn't have one.”

To clarify what a sovereign wealth fund is, according to Simon Johnson of the International Monetary Fund, a way for countries running a surplus to invest that money. Surpluses are, in case you have forgotten from the days when our country also had one, is extra cash that the country does not need for immediate purposes.



There are about twenty sovereign funds in existence now, investing about $3 trillion dollars. Alaska and Canada have one, investing oil money for the future of their citizens. Russia, China and numerous Asia-Pacific nations use money they do not need to invest in places needing a cash infusion. Lately, that has been us.

Mr. Johnson says not to worry though, the amount of money being used in these funds is only a small portion of the global value of trade securities.

Mr. Sloan continues, “So Social Security's cash surplus -- about $90 billion this year -- goes into Treasury securities. Its trust fund owns more than $2 trillion of them, but they're not wealth. Because when Social Security takes in less cash that it spends, the funds won't make it any easier for the government to cover the checks than if there were no fund.”

A sovereign wealth fund could do so much more by purchasing, “high-rated corporate bonds, home mortgages of credit-worthy borrowers or anything solid” meaning anything carrying a high credit rating that could generate significant interest wealth over the long-term.

“Then,” he continues, “when Social Security needs cash, the fund would have real wealth. Now, I don't think for a minute that anyone in Washington has the nerve to do this, because it would involve admitting the trust fund is useless. So, we'll keep doing what were doing. Instead of building a Social Security sovereign wealth fund, we're running an impoverishment fund and our children and grandchildren will get to pay for it.”

Retirement Planning and Optimally Saving

This is the popular notion:

“A long time ago, New England was known for its thrifty Yankees.
But that was before the baby boomers came along. These days, many New Englanders in their 30s and 40s, and indeed their counterparts all over America, have a different style: they are spending heavily and have sunk knee-deep in debt. . . A recent study sponsored by Merrill Lynch & Co. showed that the average middle-aged American had about $2,600 in net financial assets. Another survey by the financial-services giant showed that boomers earning $100,000 will need $653,000 in today’s dollars by age 65 to retire in comfort—but were saving only 31 percent of the amount needed. In other words, the saving rate will have to triple. Experts say the failure to build a nest egg will come to haunt the baby boomers, forcing them to drastically lower standards of living in their later years or to work for longer, perhaps into their 70s. (Wall Street Journal, Wysocki 1995, A1)”

And here is the contrarians view:

John Karl Scholz (University of Wisconsin–Madison and National Bureau of Economic Research) Ananth Seshadri (University of Wisconsin–Madison) Surachai Khitatrakun (Urban Institute) suggest, in a paper titled “Are Americans Saving ‘Optimally’ for Retirement?" the following:

“We solve each household’s optimal saving decisions using a life cycle model that incorporates uncertain lifetimes, uninsurable earnings and medical expenses, progressive taxation, government transfers, and pension and social security benefits. With optimal decision rules, we compare, household-by-household, wealth predictions from the life cycle model using a nationally representative sample. We find, making use of household-specific earnings histories that the model accounts for more than 80 percent of the 1992 cross-sectional variation in wealth. Fewer than 20 percent of households have less wealth than their optimal targets, and the wealth deficit of those who are under-saving is generally small.”



So who is right? And as I ask in the book, “How could you save too little?” The authors use a stochastic (from the Greek for guess) life cycle model that, it should come as no surprise is what the insurance industry uses when they do actuarial estimates. But that is another book.

The authors look at “precautionary savings and buffer stock behavior” as well as “end-of-life uncertainty and medical shocks”, what they call “the evolution of average effective federal income tax rates over the period spanned by our data” and “realistic expectations about earnings; about social security benefits, which depend on lifetime earnings; and about pension benefits, which depend on earnings in the final year of work.”



Using that info they then began “calculating optimal life cycle consumption profiles.” They were also concerned with “he timing of earnings shocks can cause optimal wealth, which can “vary substantially, even for households with identical preferences, demographic characteristics, and lifetime income.”

And based on that, they wrote, “We find that over 80 percent of households have accumulated more wealth than their optimal targets.”

To make this claim, they offer the following as way of quantifying that statement. “Households typically maintain living standards in retirement by drawing on their own (private) savings, employer-provided pensions, and social security wealth.” Private savings is described as “housing assets less liabilities, business assets less liabilities, checking and saving accounts, stocks, bonds, mutual funds, retirement accounts including defined-contribution pensions, certificates of deposit, the cash value of whole life insurance, and other assets, less credit card debt and other liabilities. It excludes defined-benefit pension wealth, social security wealth, and future earnings.”


In short, and you can read the entire paper here, we fail to calculate what we have in assets, our ability to accumulate wealth over the course of our working careers, and our changing life style habits which could allow us to downsize quite effortlessly, giving us access to accumulated wealth equity in our homes.

Key is to this savings is keeping debt manageable and low as you enter the waning years of your working career.