Retirement Preparation Page 2. Reasons for a Failed Retirement Plan Page 3. Retirement Income Page 4. Retirement Income Sources Page 5

Transcription

1 Index Retirement Preparation Page 2 Reasons for a Failed Retirement Plan Page 3 Retirement Income Page 4 Retirement Income Sources Page 5 Retirement Plan Process July 2016 Investor Education Investor Education is Critical to reach your Financial Goals Wealth gives you Freedom and Control of your Life Setup an Auto-Investment Plan to Invest on a Regular Basis in Bull and Bear Markets Create a Diversified Portfolio with the Proper Asset Allocation Purchase Quality Investments Manage your Portfolio Properly PDM Investment Services, LLC A Registered Investment Advisor 5131 Standish Drive, Troy, Michigan * * info@fginvestor.com For complete disclosure see our website Retirement Income Plan Page 7 Retirement Projection Graph Page 8 Retirement Plan Elements Page 9 Investment Summary Page 10 Investment Total Allocation Page 12 Portfolio Analysis Page 13 Retirement Income Details Page 16 Income Producing Portfolio Page 17 Bond Investments Page 19 Happiness in Retirement Page 21 Reverse Mortgage Income Page 23 Elder Law Page 24 Medicaid Eligibility Page 25 1

2 Retirement Preparation Old Linear Retirement: New Cyclical Retirement: School, work, retirement at 62 with pension and death at 75 years old. School, work, semi-retirement at 55 with no pension, school/lifelong learning, 20 year second career part time, full-retirement at 75 and death at 85 to 110. Part time work will be required to support living longer. Most people spend more awake time with their co-workers than their families. They have connections, relationships and friendships tied to their job. Some of these friendships will persist, but many will simply fade away. Retirees who engage in hobbies, clubs, part-time jobs, volunteer work and join organizations are happier, healthier and more youthful. These activities help fill the social void from your job. When you retire early, you have to do something to keep your brain active or you will likely end up depressed. Starting your own business, working in a different field or contract work in your field are common activities for retirees. 70% of pre-retirees say they want to keep working after they retire. 50% of current retirees work part time now. Most people that work in retirement do so because they want to and not out of necessity. Phase 1 Phase 2 Phase 3 Phase 4 Preretirement Planning Start planning at least 4 years before you retire for a part-time second career. To prepare for retirement you should engage in retirement activities before you retire. Some of these activities could lead to a small business or a part time job for fun. Taking a class or getting a certification can be helpful. Expand your business network, start volunteer work or work part-time in a field you may be interested in entering in retirement. See if you can turn a hobby or something you are passionate about into a second career. Career Intermission Once you retire from your full-time career you will likely want to take some time off to recharge and retool. Do not wait more than a year or your skills will slip. Re-engagement 80% engage in part-time work, 30% own their own business and 60% venture into a new field. Some common second career ideas are gardening, investment advisor, cooking, web designer, home repair, dog breeding, internet product trading and consulting. Full Retirement, Leisure Retirees with higher income at 65 on Medicare will have to pay higher premiums for Part B and Part D which are based on income. If you start social security early at 62, you may lose some of your benefits if you exceed a defined income amount. 2

3 Reasons for a Failed Retirement Plan Divorce In a divorce assets get split up 50% and total costs of separated couples are higher. Second Home Second homes cost more money and time than people think, unless they are rented when not used by the owner. Once a person retires their income typically falls, making it more difficult to support two homes. Second home tax deductions are gone. Second homes are not liquid and fell sharply in value in the financial crisis. Drain from Adult Children Helping children with a home purchase, starting a business or through a rough patch can put your retirement at risk. Starting a Business Most people who start their own business in retirement produce lower returns than the investment portfolio they borrowed the money from. The safest businesses to start are the ones that do not require much capital commitment like consulting. Skills required to start and run your own business are listed below. Subject Matter Skills, Analysis Skills (Knowledge, Interest, Passion, Creativity) Financial Skills, Taxes (Return on Investment) Organizational and Management Skills Execution and Hard Work Marketing, Interpersonal Skills, Communication Skills Health Care Costs Health care costs will continue to rise reducing our savings. Overspending Assets Many people have a difficult time reducing spending in the early years of retirement because the overspending habit is hard to break. Elder Fraud Seniors are the top target of financial abuse by scammers. 3

4 Retirement Income In retirement, your goals switch from accumulation of assets to withdrawal. Your goals should be income oriented and less about beating a benchmark. Focus should be on total account management, a steady income stream and tax consideration on withdrawals from each account. AAII 2016 Article: Manage your taxable distributions so that you minimize taxes throughout all of your retirement years. A married couple filing jointly in 2016 taking only the standard exemptions and deductions available to everyone can recognize $96,000 of income before their marginal tax rate exceeds 15% and $98,500 if over 65 years old. Most retied couples spend less than $96,000 per year. ($8,000 per month). This provides a lot of opportunity to take IRA distributions that are taxed relatively lightly. Failing to fill up these tax brackets with low-taxed income leads to missed opportunities that push retirees into higher tax brackets in future tax years. 4

5 Retirement Income Sources Retirement income comes from different sources. Below is a list of variables that will affect the decision of when and where income should come from. Age of each spouse Health of each spouse Life expectancy of each spouse Income sources available Tax situation Money should be taken out of the accounts in a way to pay the least amount of taxes and keep you in the 15% federal tax bracket. Take income out of accounts in the following order in most cases, but also max out IRA distributions up to the top of the 15% bracket in years you can when taxes are low keeping taxable account distributions for higher tax years. Tax-efficient Retirement Income Sources Investors receive income from Social Security, Pensions, IRA s, 401 (k) s, Taxable Accounts and Roth IRA s. Each year evaluate your tax situation and setup an income withdrawal plan. The traditional order of withdrawal is listed below. Social Security (Taxed as ordinary income) Pension (Taxed as ordinary income) Taxable (Tax free withdrawals) (Dividends and capital gains distributions taxed each year and capital gains upon sale, lower tax rate) Traditional IRA/401k with RMD (Taxed as ordinary income) (Grow tax deferred) (Hold on to tax-deferred benefit as long as can and avoid ordinary income higher tax rate) Roth IRA/Roth 401k Paying some taxes along the way from tax-deferred accounts may reduce a larger tax hit later. Taking money out of taxable accounts first and tax deferred accounts last keeps the most money growing tax deferred and keeps your tax rate lower. When your taxable accounts are gone and you take money out of your IRA s, your tax rate could jump to a higher bracket. Work with your investment advisor and accountant to take distributions from taxable and tax deferred accounts to keep you in a lower tax bracket and taking advantage of the current low marginal tax rates. Save Roth distributions till the end or when you have a big tax year and need to lower your taxes. Drawing primarily from tax-deferred accounts to reach the upper limit of that bracket could reduce the RMD distributions from these accounts Inherited taxable accounts are more valuable than tax-deferred accounts to heirs because they receive a stepped up tax basis. Pension Taxable distributions at ordinary income rates. May want to take a lump-sum distribution and roll into an IRA if pension fund is weak or life expectancy is short. Distributions can start as early as 55 years old. Taxable Account Capital gains and dividends taxed. No distribution limitations. 5

6 Social Security Taxable distributions at ordinary income rates. In most cases, best to wait until full amount at 67 years old or 70 if can. Below is an example of a person with a $100,000 income. Also consider spouse health and age. Distributions at 62: $1,620/month Some health issues and may not live past 75 years old and may need the money. Distributions at 67: $2,235/month +38% Good health and will likely live past 75 years old and does not need the SS money. Distributions at 70: $3,040/month +88% Good health and will likely live past 80 years old and does not need the SS money. Fixed Income Annuity Capital gains and dividends taxed. Can start taking distributions at 59.5 years old. Traditional IRA or 401 (k) Taxable distributions at ordinary income rates. You can start taking distributions at 59.5 years old. Roth IRA Tax free distributions. Can start taking distributions at 60 years old. Required Minimum Distributions (RMDs) You must take these payouts annually from your Traditional IRAs, 401 (k) s and Inherited Roth IRAs. You must take your first distribution by April 1 st of the year following the year in which you turn age Each year after, you must take the distribution by December 31 st of each year. The calculation is based on the balance of each account on December 31 st of the previous year and your life expectancy. Adjust account balance with any rollovers into the account during the year. Calculate on an account-by-account basis. These distributions are taxed at ordinary income tax rates. If the distribution is not made, you will have to pay a 50% penalty on the amount you owe that year. Your custodian may send you a statement with your RMD amount in Q1 of each year. The RMD amount can be calculated based on the following: Balance of IRA/401k accounts on December 31 st of previous year / by life-expectancy factor For life-expectancy factor see the Uniform Lifetime Table III in IRS Publication 590 (enter your age each year) Inherited IRA s are calculated based on the survivor s age. If your spouse is more than 10 years younger than you and sole beneficiary, use the IRS Joint Life and Last Survivor Expectancy Table II. Qualified charitable distributions (QCD) allow retirees to divert all or part of their RMDs to charity to reduce their tax impact. Congress has typically waited until December of each year to extend this provision one more year. 6

7 Retirement Income Plan Retirement Income Spend in Retirement Goal $5,600 $7,000 Per Month After Tax Per Month Before Tax Total Retirement Income Plan 60 Years Old in 2016 Annuity Draw (Mix) $2,400 $3,000 Pension Husband (Taxable) $1,600 $2,000 Investment Portfolio (Taxable) $1,600 $2,000 (5% annual return) Total Income $5,600 per month max 67 Years Old in 2023 Annuity Draw (Mix) $2,400 $3,000 Pension Husband (Taxable) $1,600 $2,000 Investment Portfolio (Taxable) $1,600 $2,000 (5% annual return) Social Security Husband (Taxable) $1,600 $2,000 Social Security Wife (Taxable) $ 500 $1,000 Total Income $7,700 per month max Investment Portfolio Assumptions Return adjusted for a 2.5% inflation rate. Numbers and calculations are estimates and should be updated annually. Longer-term returns are more accurate than short- term return calculations. Capital gains tax should be paid with extra money. Estimated returns are based on your timeframe, strategy and risk level. Future value calculations are calculated using the assumptions in the table and the excel FV formula. Annual returns are based a 5% annual return on investment, a 20% combined federal and state tax rate and no depletion of capital. Investment portfolio return used is a 5% annual return. There is a high probability a conservative retirement portfolio can produce a 5% annual return over the next 10 to 30 years, on average. It is likely this portfolio would show no capital depreciation. 7

8 Retirement Projection Graph Investment Portfolio (20% tax rate) The max you could withdraw from your Investment Portfolio with a 95%+ probability of not running out of money by 90 years old is $5,500 per month ($4,400 after tax spend) starting at 55 years old. There is a 92% probability of not running out of money if you take out $8,300 per month ($6,640 after tax spend). The projection uses your same Scottrade portfolios I manage. See parameters below. The dark line is the most probable and the shaded area is the possible extremes. 8

9 Retirement Plan Elements A Retirement Plan is a written long-term plans to guide you to meet your retirement goals and maintain income in retirement. A plan provides peace of mind to your family and increases one s confidence and effectiveness in managing income, spending, saving, debt and investing. Investment Goals Document your goals, time horizon and risk tolerance. Employ an INCOME and GROWTH strategy with a CONSERVATIVE risk. (Base Allocation: 60% Stocks and 40% Bonds & Cash) How much do you need to save for retirement to maintain your standard of living? The Wealth-to-Income Ratio says you should have saved 10 times your working average annual income by the time you retire. If your average annual income is $130,000, you can retire comfortably with $1,300,000. Income Sources Document your income sources. Typical income sources include Social Security, Pension and Investment Income. Spending Plan Document your monthly spend. Create a budget. What are your liquidity needs? Debt Reduction Plan Document your debt level. Focus on reducing your debt to zero. Make double house payments. Pay off high interest loans first. Pay off credit card balances each month. Establish a good credit rating to get lower interest loans. Maintain a Sound Investment Plan Document your investment plan. Your investment plan should be reviewed annually with your financial advisor and your portfolios should be measured for performance, performance consistency, risk, risk adjusted return, maximum drawdown and cost. Select a Sound Financial Advisor and Invest in Sound Investment Strategies The investment process is complicated and requires strict discipline without emotion. Without professional guidance, you will likely produce mediocre returns, and not meet your retirement goals. You should always seek professional advice unless you receive the proper training, invest in the proper tools, and are willing to put the time into managing your portfolio. Most people find investing complicated, have difficulty finding good advice and are worried about losing money. Select a financial advisor to create and support your wealth building plan, select the best investment strategies and design and manage your investment portfolios. Your wealth plan should be reviewed annually with your financial advisor and your portfolios should be measured for performance, performance consistency, risk, risk adjusted return, maximum drawdown and cost. 9

10 Investment Summary ING 457 Account, Deborah PDM Investment Services designed, client managed Conservative risk (Base Allocation: 60% stocks / 40% bonds & cash) $112,930 Scottrade IRA Account, David PDM Investment Services design & managed Conservative risk (Base Allocation: 60% stocks / 40% bonds & cash) Performance: See full-page report. $65,097 Scottrade Taxable Account, Joint PDM Investment Services design & managed Conservative risk (Base Allocation: 60% stocks / 40% bonds & cash) Performance: See full-page report. $31,905 10

11 Proposed Action List Spending Plan Review your budget annually and try to maintain your spending level. ING 457 Change the allocation of the Current Balance to the new allocation. At 70.5 years old you will start withdrawing at least at the Required Minimum Distribution rate and pay income taxes at your ordinary income rate. If you no longer want to spend the time implementing the new portfolio each year, you want to consolidate accounts or the performance underperforms the Scottrade performance by more than 1% each year, you could roll the 457 over to your Scottrade IRA. The ING 457 has limited fund selection and poor bond fund selection. The portfolio management fee would be lowered from 1.0% to 0.9%. Scottrade Taxable At some point you may need to start withdrawing as expenses rise. Scottrade IRA At 70.5 years old you will start withdrawing at least at the Required Minimum Distribution rate and pay income taxes at your ordinary income rate. Insurance Planning Review your apartment, auto and health needs and rates annually. Tax Planning Currently using an accountant for tax returns. Capital gains taxes are zero with the present tax law. Estate Planning Make sure you keep your Will updated working together with an estate attorney. Investment Education Continue to read the Focused Growth Investor and Investment Education reports. 11

12 Investment Total Allocation Combine the holdings of all your investment accounts so you can look at the total allocations. The total allocations will help identify deficiencies and areas of improvement. See the example below. Total Allocation Taxable / Tax Deferred Financial Advisor Asset Allocation Risk Allocation 12

13 Portfolio Allocation & Analysis, ING 401 (k) Goal: Retirement Income Risk Tolerance: Conservative (60% stocks / 40% Bonds & Cash) Amount: $112,930 The portfolio is designed to meet your goals, risk tolerance and time horizon. Grades are derived from technical charts, fundamentals and other rating services. Funds listed below may be like funds and not exactly the ones in the plan. Similar fund * Change the allocation of the Current Balance to the new allocation below. FUND TICKER ASSET ALLOCATION GRADE SYMBOL CLASS SSgA S&P 500 Index SVSPX LCG 6% B Oakmark Equity & Income OAKBX LCG 6% B Dodge & Cox Stock DODGX LCV 8% B Artisan Mid-Cap ARTMX MCG 8% A T. Rowe Price Mid-Cap Value TRMCX MCV 8% A ING Small Company Growth AESGX * SCG 7% B Ridgeworth Small Cap Value SCETX SCV 9% A American Funds EuroPacific Growth RERFX INT LCG 8% B SSgA Emerging Markets SSEMX INT EM MKT 0% B PIMCO Total Return PTTRX IT BOND 20% B Stable Value Fund (2% annual return) MM 20% B Analysis The portfolio is conservative risk, diversified and has a fund quality of a B+ average grade Your portfolio performance saw a 13% return. The Morningstar Conservative Target Risk Benchmark saw a 7.1% return. Asset Class Key LCG-Large Cap Growth, LCV-Large Cap Value, MCG-Mid Cap Growth, MCV-Mid Cap Value, SCG-Small Cap Growth, SCV-Small Cap Value, INT-International, INT EM MKT-International Emerging Market, INT BOND-International Bond, HY BOND-High Yield Bond, IT BOND- Intermediate Term Bond, ST BOND-Short Term Bond, MM-Money Market. 13

14 Portfolio Allocation & Analysis, Scottrade IRA Goal: Retirement Income Risk Tolerance: Conservative (Base Allocation: 60% stocks / 40% bonds & cash) Amount: $65,097 The portfolio is designed to meet your goals, risk tolerance and time horizon. Grades are derived from technical charts, fundamentals and other rating services. Your exact portfolio may vary from the allocation and funds below due to availability and fund minimums. TICKER ASSET ALLOCATION GRADE SYMBOL CLASS Mairs & Power Growth MPGFX LCG 8% A Price Value TRVLX LCV 7% B Akre Focus AKREX MCG 6% B Fidelity Low Priced Stock FLPSX MCV 6% A Broadview Opportunity BVAOX SCG 4% B Stratten Small Cap Opportunities STSCX SCV 5% A Harbor International HIINX INT LCG 4% A Oakmark International Small Cap OAKEX INT LCB 4% A ishares MSCI Pacific ex-japan ETF EPP ASIA 0% B Buffalo Discovery BUFTX TECH 5% A Price Financial PRISX FIN 4% B Fidelity Select Health Care FSPHX HC 5% B UBS E-TRACS Alerian MLP Infrastructure ETN MLPI NAT RES 2% A Loomis Sayles Global Bond LSGLX INT BOND 5% B PIMCO High Yield Bond PHYDX HY BOND 8% B PowerShares Senior Loan Portfolio ETF BKLN BANK LOAN 7% B Vanguard Short Term Investment Grade Bond VFSTX ST BOND 15% B Money Market MM 5% NA Analysis The new portfolio is conservative risk, diversified and has a fund quality of a B+ average grade Your portfolio performance saw a 15% return. The Morningstar Conservative Target Risk Benchmark saw a 7.1% return. 14

15 Portfolio Allocation & Analysis, Scottrade Taxable Goal: Retirement Income Risk Tolerance: Conservative (Base Allocation: 60% stocks / 40% bonds & cash) Amount: $31,905 The portfolio is designed to meet your goals, risk tolerance and time horizon. Grades are derived from technical charts, fundamentals and other rating services. Your exact portfolio may vary from the allocation and funds below due to availability and fund minimums. TICKER ASSET ALLOCATION GRADE SYMBOL CLASS Mairs & Power Growth MPGFX LCG 10% A Price Value TRVLX LCV 10% B Akre Focus AKREX MCG 8% B Fidelity Low Priced Stock FLPSX MCV 8% A Broadview Opportunity BVAOX SCG 7% B Stratten Small Cap Opportunities STSCX SCV 9% A Harbor International HIINX INT LCG 8% A Loomis Sayles Global Bond LSGLX INT BOND 5% B PIMCO High Yield Bond PHYDX HY BOND 8% B PowerShares Senior Loan Portfolio ETF BKLN BANK LOAN 7% B Vanguard Short Term Corporate Bond ETF VCSH ST BOND 15% B Money Market MM 5% NA Analysis The new portfolio is conservative risk, diversified and has a fund quality of a B+ average grade Your portfolio performance saw a 15% return. The Morningstar Conservative Target Risk Benchmark saw a 7.1% return. 15

16 Retirement Income Details Below is your estimated retirement income stream and spending. The income amounts are fixed in age 66 dollars. Social Security will see small COLA increases. Assume spending drops as you age and inflation on expenses rise at the same pace to offset the spending decrease. A combined tax rate of accounts taxed at the ordinary income tax rate (social security, pensions and IRAs) and accounts taxed at capital gains rates only (taxable accounts) is used. Investment income did not start until age 75, to help compensate for inflation. Social Security $1205 per month + COLA Age: 66 years old until death. Risk: Government reduces payout by 25% due to decreased funding and increased longevity. Pension $2411 per month 4%) Age: 66 years old until death. Risk: State Pension goes bankrupt. Monthly Income (66) Social Security $1205 Pension $2411 Investment Portfolio $0 Total less 15% Taxes $2984 Spending (66) Medical $1,820 Annual Rent $12,120 House Expenses $288 General Spending $1,900 Utilities $4,128 Groceries $4,560 Entertainment $3,000 Automotive $2,784 Insurance $3,300 Total Annual Spend $33,900 Total Monthly Spend $2,825 Monthly Income (75) Social Security $1205 Pension $2411 Investment Portfolio $1000 Total less 15% Taxes $3924 Investment Portfolio $1000 per month 5.5%) Age: 75 years old and onward. Risk: Stock & Bond Market Risk Spending (75) Medical $1,820 Annual Rent $12,120 House Expenses $288 General Spending $1,900 Utilities $4,128 Groceries $4,560 Entertainment $3,000 Automotive $2,784 Insurance $3,300 Total Annual Spend $33,900 Total Monthly Spend $2,825 X 20% Inflation $3,390 16

17 Income Producing Portfolio Below is the cash flow from our Conservative Risk Portfolio. The portfolio return rate column has a 3% average annual return and shows typical 6 year market cycle year-to-year variation returns. The 2.5% dividend income plus 3.0% portfolio gain income is a forecast based on past returns and future expectations. Starting portfolio amount Income Output Time Frame Dividend Income Expectation Capital Gain Expectation Total Return Portfolio Management Fee Ending Portfolio Amount $273,914 $1000 per month 30 Years 2.5% per year 3.0% per year 5.5% per year (High probability) 1.0% of AUM per year $232,816 in 30 years in 2014 dollars 17

18 . 18

19 Bond Investments Interest rates have been falling since 1982 bottoming in 2012 as the Federal Reserve kept them artificially low to keep the economy afloat. This long drop in interest rates has helped enhance bond investments over the past 30 years. The trend started reversing in 2013 and interest rates can only go up from here if the economy improves and inflation increases. The Federal Reserve started reducing quantitative easing in 2014 and raising interest rates to normal levels as the economy improves, inflation rises and employment picks up. With a 1% rise in the 10-Year Treasury, expect to see long-term bond funds lose about 10%, intermediate-term bond funds lose about 3% and short-term bond funds lose about 1%. A 1% rise in long-term interest rates would mean a treasury bond with 7-year duration would be expected to fall 7% in value. A Treasury bond with a 2-year duration would only fall 2%. We could see long-term rates rise another 2% to 3% during this expansion. The 10-year Treasury bond bottomed at 1.5% in 2012 and has doubled to 3.0% by the end of The 10-year Treasury rose to 5.0% in 2007 and 6.5% in 2000 before bear markets. In 2013, the 10-Year Treasury bond rose 1.3% from 1.7% to 3.0%. Maturity is the point that the bond comes due. Duration is a complicated metric that measures a bond s sensitivity to interest rate risk. Most high-yield bonds have a maturity of 10 years, but are callable in five. The duration of the bond is listed as 5 years, but could change to 10 years if the bond is not called at 5 years. If interest rates are lower the company may call the bond in 5 years and purchase a lower coupon bond. If interest rates are higher, the issuer is less likely to call the bond and now use the 10-year duration measurement making it more sensitive to interest rate risk. As interest rates rise and investors see their high yield bonds fall in value they will sell forcing fund managers to sell more bonds at the wrong time. Each type of bond type will react different to rising interest rates depending on duration, credit conditions and market demand. Bond fund total return comes from dividends and capital gains. Each bond category has a different risk. Risk in bond funds include interest rate levels, changes in interest rates, currency changes, market demand and bond quality. A diversified mix of bond categories can help reduce risk and improve returns. International Bond Funds perform the best to U.S. investors if their country base interest rate is higher and not rising and their currency is stable or rising against the U.S. dollar. Normally international bond funds offer protection against rising U.S. interest rates because their interest rates and currencies are different unless rising interest rates in the U.S. are seen as competition to their rates. Since interest rates in developed countries tend to rise together, international bond funds may suffer from rising U.S. interest. These funds are sensitive to quality, duration interest rate risk, currency and market risk. Fidelity New Markets Income fund lost 6.4% in Yield = 4.9%. Loomis Sayles Global Bond fund lost 3.0% in Yield = 2.5%. High Yield Bond Funds are tied more too economic growth than interest rates. These funds are sensitive to quality and market risk. PIMCO High Yield Bond Fund gained 5.4% in Y=4.7% Master Limited Partnership Funds (MLPs) are vulnerable to rising interest rates as competition rises from bonds and CDs. Higher interest rates increase the cost of capital, adding pressure to earnings. These funds are sensitive to interest rate and market risk. UBS E-TRACS Alerian MLP Infrastructure fund gained 27% in Yield = 4.5%. 19

20 Bank Loan Funds are short-term duration, but carry bond quality and liquidity risk. These funds are sensitive to quality and market risk. PowerShares Senior Loan Portfolio gained 4.1% in Y=4.2%. Municipal Bond Funds are hurt by rising interest rates because they have long-term durations. These funds are sensitive to quality (Detroit and Puerto Rico defaults), duration interest rate risk and market risk. Vanguard Long-Term Tax Exempt Fund lost 2.9% in Y = 3.9%. Long-Term Bond Funds performed the worst, because they are the most sensitive to rising interest rates. These funds are sensitive to duration interest rate risk. Vanguard Long-Term Government Bond Index lost 12.7% in Y = 3.4%. Vanguard GNMA fund lost 2.1% in Y = 2.6%. Short-Term Bond Funds have a low yield but offer some protection from falling interest rates. Vanguard Short-Term Investment Grade Bond fund gained 1.0% in Y = 1.7%. Happiness in Retirement Close to 60% of those who retire will be seeking part-time work within a year. Studies show that the predominant reasons have more to do with social, intellectual and personal challenge factors, than with pay. Growing old with lots of money is no longer the goal. Dying rich can t compete with living rich. This generation is headed to the frontlines of cultural and world needs of making a difference and participating in loved one s lives. Real retirement will come on the expiration date of intellectual capital and experience. Vision of a Successful Retirement Retirement is defined as the point in time when no income comes directly from one s labor. Many people with adequate money struggle with being retired. What does a successful retirement mean to you beyond having money? Years before you retire, create a compelling vision of your retirement. Describe the perfect week in retirement, in detail. Will you be happy with this new routine? How will you fill the free time? Are you ready to spend a lot more time with your spouse? Retirement is not always like a long vacation full of fun. There is more to retirement than family, golf, travel and grandkids. Below are key categories that make up a happy retirement. Sense of Control Money & Health Follow a sound wealth building plan so you have enough money to live comfortably in retirement. Exercise, eat healthy and control the stress in your life so you will be healthy to enjoy your retirement without a lot of health issues. Good health correlates with higher levels of happiness. Optimism Belief in God - Sense of Purpose Helping Others Life is a journey with a beginning and an end. Make the best of each phase of your life. Accept your crosses, create a positive legacy to be remembered by, and have fun. People who have a sense of purpose and help others are happier. As you enter the later stages in life, it will become more important to believe you will go to a better place after your life on earth ends. Close Relationships Friends, family and close relationships are also very important. Married couples are happier in retirement than singles. 20

21 Keep Busy Hobbies Clubs Organizations Most working people spend more awake time with their co-workers than their families. They have connections, relationships and friendships tied to their job. Some of these friendships will persist, but many will simply fade away. Retirees who engage in hobbies, clubs, part-time jobs, and join organizations are happier. These activities help fill the social void from your job. Some of these activities can be done with your spouse, and some should be done with others. Watching more television does not contribute to happiness. To prepare for retirement you should engage in retirement activities before you retire. Some of these activities could lead to a small business or a part time job for fun. Taking a class or getting a certification can be helpful. See the list of activities below. Gardening Cooking, cake decorating, baking, wine tasting, beer making Investment club, bookkeeper Event planner Computing, mechanical tinkering, home repair, home theater, cars Home-care aid, pet sitting, nanny, personal assistant, senior watching Sports, golf, biking, hiking, flying, bird watching, build an aquarium, boating, fishing, camping, hunting, dog breading, running, walking, weight lifting, snorkeling, scuba diving Games, card playing, bowling, puzzles, video games Antiquing, sewing, knitting, crafts, jewelry, art, photography, dancing, singing, movies, music, playing a musical instrument, collecting, models, drawing, painting, scrapbooking, woodworking, writing Shopping, retail Reading Travel Volunteering, church activities, driver Coaching and mentoring, tutor Join an organization Self Confidence Challenged Talents God gave everyone talents and he expects them to be used to make the world a better place. The sooner in life you discover your true talents and expand upon them, the better you will feel about yourself. After you retire, you may find you are no longer challenged, have less control and your self-confidence may weaken. In retirement, you find that things you have no control over like the stock market, tax codes, health insurance and your diminishing health affect you more. Individuals who retired voluntarily are happier than those forced out of their jobs. Some people tend to tie so much of their self-image to their work. When they leave their full-time job, it alters their entire social structure. If you plan on retiring early in your fifties, you should start planning what you will be doing in retirement early. Doing nothing in retirement will not make you happy. Start a small business before you retire or start thinking about a part-time job you would like. Do something you love without worrying about how much it will pay. 21

22 Examples of Positive Weekly Activity Meet a friend for lunch, volunteer work at church, a routine exercise schedule, a part-time job, play golf on a league, going to a gardening class, going to a local garden to do volunteer work, reading your new book, visiting family together and going to church and dinner together. Books on Retirement Happiness AARP Great Jobs for Everyone 50+ List of part time jobs in retirement. Kerry Hannon What s Next General book about retirement life. Kerry Hannon Your Career Asset: Developing, Managing and Optimizing Career, income and retirement planning. Michael Haubrich Your Greatest Financial Advantage What Makes a Retiree Happy, by Keith Bender Affective Wellbeing in Retirement, Journal of Happiness Studies, by Andrew Burr and Jonathan Santo Reference Information: Financial Advisor Magazine, January 2012, by Dan Moisand, CFP Planning a Second Career Find Your Passion Build Your Network Learn New Skills, Education, Certifications, Workshops, Seminars, Organizations Further Education Build Financial Stability Starting Your Own Business To be successful at any business, you have to have some management skills, organizational skills, strong work ethic, people skills, writing skills, some business skills and you will have to develop your marketing and accounting skills. A passion for investing is also important. Try part time while still working Find a mentor Write down a business plan Have a plan B Hire a good accountant Learn QuickBooks Hire a good lawyer Form a business like an LLC with the state (easy) Open a business bank account and credit card Get required certifications Learn compliance and legal Marketing (Website, logo, business card, brochure, build your network and marketing plan) Setup a good Linked-In page 22

23 Reverse Mortgage Income Reverse mortgages allow older homeowners to convert the equity in their primary residence into a liquid, usable retirement income resource. Borrowers must be 62 or older and must either own their home outright or use the proceeds of the reverse mortgage to pay off the balance of their existing mortgage. They retain ownership of the home and must continue to maintain it and pay their property taxes and homeowner s insurance. Distributions are tax-free and can be taken as monthly payments for a fixed period of time, as long as the borrower remains in the house, as a line of credit or as a combination of payout options. Interest accrues monthly only on the amount borrowed, not on the unused lines of credit. No repayment is required until the last borrower sells the house, moves out permanently or dies. Because it is a nonrecourse loan, the borrower or heirs can never owe more than the home worth, even if that value is less than the loan balance. You do not have to repay the loan until you sell the house. At that point, you have to repay the bank both principal and interest upon sale of the house. The Reverse Mortgage Stabilization Act of 2013 now prevents reverse mortgage borrowers from using too much equity too soon and protects spouses who are younger to be co-borrowers on the loan by ensuring they can remain in the house after the older spouse dies. No more money can be borrowed when the older spouse dies. Unlike traditional mortgages or home equity lines of credit, borrowers do not need to meet income qualifications. Independent consolidation is now required to review your situation and risks before you can take out a reverse mortgage. During the financial crisis, retirees took out reverse mortgages when home prices were high, took out the maximum 60% or more cash and spent the cash. High interest payments of 7% accumulated and home prices plummeted taking the mortgage under water causing retirees to have to make large sum payments to keep the house above water. If they could not come up with the money the homer went into foreclosure driving them out of the house. Initial setup fees have been reduced. The upfront mortgage insurance premium fell from 2.5% to 0.5% of the loan amount. Mortgage closing costs are now in-line with mortgage costs. Interest rates are variable and are running between 4.0% and 5.0% in The interest rate is tied to the mortgage insurance premium (1.25%), lender margin (2.5%) and the monthly Libor rate (0.8%). Since interest rates are variable, they can increase. Reverse mortgage income is another source or retirement income if you plan to stay in your home for at least 15 years due to high upfront costs. Analysis People take out reverse mortgages so they can stay in their house they can no longer afford or are going to outlive their income stream and run out of money. Our take is you are better off selling your home, downsizing, reducing your spending and using the cash from the home sale to build up your retirement investment accounts to produce the additional income needed. Jane Bryant Quinn Article 2016: A reverse mortgage line of credit taken out early at 62 years old may make sense for some retirees if they use the line of credit for income instead of drawing from their IRA. Their IRA would then grow tax deferred without withdrawals until 70.5 years old. The reverse mortgage income stream could be used during secular bear markets like the one from 2000 to 2009 to avoid investment portfolio withdrawals during severe market downturns. 23

24 Elder Law Elder law attorneys advise clients on the Medicaid law and what can and cannot be done legally within the law. Medicaid is a highly complex area of the law; it varies from state to state and changes over time. Professional help is expensive, but mistakes cost more. We recommend you see an Elder Law attorney if you want to preserve your estate. The information listed below is general information that will change and may not be correct. Topics covered by Elder Law attorneys: Social Security Medicare Medicaid Disability Nursing Homes Guardianship Estate Planning Nursing Homes A person goes into a nursing home when they need long-term care from a prolonged physical illness, disability or cognitive impairment like Alzheimer s disease that will keep them from living independently. Statistics Nearly 70% of seniors will receive help at home or in a nursing home. The nursing home stay will last an average of 3 years. 20% will last 5 years or more. Consider family history in a nursing home, health, age, smoker and alcohol abuse when calculating the probability of a nursing home stay. The average cost of a nursing home is $70,000 a year or $5,800 per month. The average cost per stay is $170,000. Nursing home funding Keep in mind that when you are in a nursing home many other expenses go away. Keeping your home and medical bills can be expensive. How much more will it cost to live in a nursing home than my current monthly expenses? Nursing home costs are paid by your estate, unless you are poor and run out of money. If you cannot make the payments, you can apply for Medicaid to help pay for a nursing home stay. Medicaid is offered by state and federal governments for people with low income and little assets. Rules vary by state. The three situations to consider for a married couple Both die without nursing home needs One dies in a nursing home and the other dies in their home One dies in a nursing home and the other goes into a nursing home and dies later 24

25 Medicaid Eligibility Any person over 64 whose net income is less than approximately $1,850 a month can qualify for Medicaid for the remaining amount of the nursing home expenses. The spouse not in a nursing home can make up to $2,500 a month. Non-excludible assets When the first spouse enters into a nursing home, all of the non-excludible assets are added up and divided equally between spouses. The spouse going into the nursing home will use up all their assets. Once assets are reduced to $2000 they can apply for Medicaid. The spouse outside of the nursing home can retain their half of non-excludible assets, up to a maximum of $100,000 plus their principal residence, personal property, burial reserve, automobile and other miscellaneous items. If there is no spouse, when home is sold Medicaid may be reimbursed. It is best to give full disclosure to the government s Medicaid agency. Hiding assets in order to qualify for Medicaid is a crime and an Elder Law attorney can help you with the law. Sheltering Assets to qualify for Medicaid nursing home benefits This is a concern if you want to maximize assets left to your children and have Medicaid subsidize your nursing home stay. Buy Long-Term Care Insurance Expensive and you may never use it. Many insurance companies dropped their plans. These premiums deplete assets also. Long-term Care investment portfolio Start an investment portfolio when you are young and contribute the LTC premium amount each year. Give away all your assets before 5 years of going into a nursing home A couple could gift $28,000 to each child each year and hope the money will be set aside if the parent needs it. It may even be legal to give away assets while you are in a nursing home. Spend all your assets without giving them away Pay off all debt to reduce expenses for spouse living in the home. Prepay real estate taxes, other large bills and funeral expenses. Buy assets for spouse living in the home that are not counted by Medicaid like a more expensive home, home repairs to increase the value, new furnace, a new car and furnishings. If the other spouse ends up in a nursing home, then this plan will add little value. One can structure one s assets in a trust in an effort to qualify for Medicaid nursing home benefits. You will loose access to the money in a trust. At most you may be able to receive income from the trust if trustee has discretion. Transfer or sale of the residence to the children with the parent reserving a life estate. Convert countable assets to income for spouse living in the home Most annuities are inappropriate vehicles for Medicaid planning unless they conform to the specific requirements of Medicaid law to protect assets. 25