An Alternate Pension Strategy

Consider this scenario: You are about to retire and are offered a pension of either $3,000 per month during your lifetime or $2,500 per month over the lifetimes of both you and your spouse. If you are married, taking the lower amount may initially seem like the best choice to help ensure continued income for your spouse should you die first.

However, there is another strategy that may allow you to select the higher monthly pension benefit, while still providing income for your surviving spouse. This alternate pension strategy involves coupling the higher monthly pension benefit with a life insurance policy. If you predecease your spouse, the policy’s death benefit will help provide a supplemental source of retirement income to offset the loss of your pension benefit (which will end at your death). This approach offers a number of advantages:

o You and your spouse receive added monthly income from the higher pension benefit. You can use a portion of these funds to pay the premium on the life insurance policy. As long as you keep an adequate life insurance policy in place during retirement, your spouse will have a source of retirement funds if you should die an untimely death.

o A life insurance policy can help provide you and your spouse with a ready source of cash for emergency or other needs. Some life insurance policies accumulate a cash value, in addition to providing a death benefit. These cash values accumulate on a tax-deferred basis. The insured can borrow against the cash value during his or her life, generally at a minimal cost, although an unpaid loan will reduce the death benefit amount. Policy withdrawals are not subject to taxation up to the amount paid into the policy. Policy loans and or withdrawals will be taxable to the extent of gain if the policy is a Modified Endowment Contract (MEC). Access to cash values through borrowing or partial surrenders can reduce the policy’s cash value and benefit, increase the chance the policy will lapse, and may result in a tax penalty.

o Life insurance provides a source of funds for your surviving spouse. Policy cash value or death benefit proceeds can be used in whatever manner your surviving spouse chooses, such as for a source of supplemental income.

However, this type of pension strategy requires disciplined management to achieve the desired results. First, you may not qualify for life insurance, or premiums may be higher than anticipated.

Also, your life insurance policy may not perform as anticipated or may lapse if the premiums are not paid. Second, a lump-sum death benefit must be properly managed to yield the anticipated income. Your surviving spouse must be able to reinvest the death benefit for retirement income with the risk that the investment may not perform as anticipated or may produce less income than required. There is an additional risk that your spouse may outlive the death benefit income or that the death benefit may “over fund” your spouse’s needs.

Third, if you waive the spousal provision, your spouse may lose benefits provided in conjunction with a pension, such as health insurance or cost-of-living adjustments, and may be unable to independently obtain them. Finally, the issuance of a life insurance policy is subject to underwriting and is not guaranteed, whereas with a pension, you can be a smoker or in poor health and still receive benefits. For assistance with your situation, be sure to consult a qualified financial professional.

America’s Changing Vision of Retirement

Retirement planning is a primary reason for long-term saving, and when people think about retirement, finances are often the focus. However, it is important to also look at the non-financial aspects of transitioning from the world of work to the world of leisure. Specifically, lifestyle changes and self-esteem issues associated with the loss of your professional identity may create difficulties. As you’re preparing strategies for your future well-being, give some thought to the kind of retirement you envision for yourself. 

Consider the following questions: What do you find fulfilling? What gets you out of bed in the morning? What are your strengths and weaknesses? Do you work well as part of a team, or do you thrive on solitude? Do you have a lot of physical energy, or do you prefer a more sedentary pace? Do you have a hobby you always wanted more time to pursue? Don’t be afraid to think outside the box. This informal self-inventory may hold the key to your vision for retirement.

Challenging Conventions

The concept of retirement in America is changing. Traditionally, retirement has been idealized as a leisurely phase of life, a reward for the many years of working and raising children. This concept is based on the assumptions that people will enjoy themselves in retirement, and that work, as we commonly know it, is the province of younger generations. However, is this concept realistic for those of us still years away from retirement, and if it is, is it what we really want? Rethinking retirement means reexamining conventional ideals to determine whether they apply to today’s reality and what we envision for ourselves. 

Intrinsic to the conventional notion of retirement are significant assumptions about work, money, and retirement standards of living. For previous generations, work was thought to be something you did for about 45 years (until roughly age 65), and then, suddenly, you never had to (or wanted to) work again. A company pension, Social Security, and some savings generally provided enough income for funding a comfortable lifestyle in retirement, including leisure, travel, and recreation.

If that’s what you want for your retirement, there is nothing wrong with pursuing that goal. However, for some, work is too much a part of their sense of “self” to be suddenly cast aside. Moreover, with so much of their daily lives centered around work, some people have difficulty imagining their life without that structure.

Furthermore, changes in employer-sponsored retirement plans (i.e., the decline of defined benefit plans and the rise of defined contribution plans) have altered our expectations about retirement funding. The responsibility has shifted from employer to employee, which means that an individual’s long-term saving for retirement must now be factored in with other savings objectives, like purchasing a house or funding a college education for children, and ongoing financial responsibilities. 

Finally, the traditional concept of retirement is based on the belief that one’s standard of living will be sustainable in retirement, and it may be for some. For others, however, it may be more practical to ask what standard of living can be maintained based on projected resources. This type of approach might help you see what is realistic (and what may be unrealistic) in your situation, and it may help you set more realistic retirement priorities. For some people, downsizing their standard of living in retirement may be acceptable. For others, however, maintaining the same standard of living during retirement as during their working years may be the goal.

Consider Phased Retirement  

As you consider the traditional concept of retirement, you may discover that it doesn’t meet your needs. Phased retirement is a term coined to describe a range of employment arrangements that allow an employee who is approaching retirement to continue working, usually with a reduced workload, in transition from full-time work to full-time retirement. Many individuals may want to continue some form of work, such as consulting, job-sharing, mentoring, or providing back-up management. Mentoring, in particular, enables an individual to transfer a lifetime of learning and experience to a friend, relative, or younger colleague. Aside from money earned from continued work, phased retirement may help you maintain a feeling of involvement in the world and may provide a sense of purpose. 

For some, phased retirement may be an option. For others, it may be a necessity. For still others, phased retirement may provide structure to daily life and the opportunity to explore other activities while maintaining a meaningful role within an organization, the community, or society in general. What’s most important, however, is to define your vision of retirement in a way that makes sense to you and is realistic considering your goals and resources. 

A Tax-Exempt Fund - That’s the Ticket!

Would you be closer to achieving your financial goals if you weren’t paying taxes on investment income? Imagine how much faster you could accumulate wealth if more of your investment return was retained to compound over time without federal taxation.


The difference between a tax-free investment and a taxable investment can be substantial. The accompanying graph shows how $10,000 grows when allowed to compound without federal taxation.


The graph assumes $10,000 of principal is invested at a nominal annual rate of 6.5% compounded monthly. This rate is for illustrative purposes only and does not take investment risk into consideration. Current, available rates may vary substantially from this illustration, as well. It is also assumed that the investor pays annual federal income tax at a rate of 31% on the total amount of interest credited to the account.


One way to achieve tax-free income with minimal risk may be through municipal bonds or municipal bond mutual funds. Tax-exempt bond fund investors are immediately diversified. Portfolio managers make gains through trading, and depending on the fund, avoid bonds that may be too volatile. The chief appeal is that municipal bond interest, with modest exceptions, is exempt from federal taxation. Some states and cities also make interest on their own obligations exempt from taxation. When buying municipal bonds or municipal bond funds, keep in mind that investment returns and principal values will fluctuate due to market conditions so that shares, when redeemed, may be worth more or less than their original cost.


As a consequence of their privileged tax status, municipal bonds may provide lower interest rates than fully taxed bonds, to which their interest rates are often measured and compared. Municipal bonds may be advisable for investors who occupy higher tax brackets, although even those in a lower tax bracket may potentially benefit from municipal bond funds.





Quality and call provisions are very important when buying municipals. Although the threat of default by some cities and public power suppliers has made news from time to time in the past, investment-grade municipals may be considered relatively secure from default. Tax-exempt bond funds reduce the administrative time required to make decisions about individual municipalities and call provisions.


Time spent determining your investment aims and working with your financial professional can help you decide which fund is best for you.

A Short Course in “Wall Street Speak”

Fear of the unknown need not prevent you from studying the financial pages and understanding the evening stock reports on your favorite radio or TV station. A short course in “Wall Street Speak” can help unlock the wealth of information provided by these investment-reporting vehicles.


The Stock Tables


The three major national stock markets that report stock performance for the previous trading day are:


The New York Stock Exchange (NYSE)—The largest and oldest stock exchange in the United States, through which NYSE-listed securities are bought and sold on an auction basis. 


The American Stock Exchange (AMEX)—The second largest U.S. stock exchange, also operating on an auction basis. Trading volume on the AMEX is much smaller than on the NYSE.


National Association of Securities Dealers Automated Quotations (NASDAQ National Market)—The major over-the-counter (i.e., non-exchange) market for trading of securities of more than 5,000 companies that generally are smaller or newer than the companies listed on the NYSE or AMEX. Trading is conducted through a telephone and computer network among dealers who are members of the National Association of Securities Dealers, Inc. The volume of NASDAQ trading always exceeds that on the AMEX and generally exceeds that on the NYSE.


Other smaller regional stock exchanges are the Boston, Cincinnati, Midwest (Chicago), Pacific (San Francisco or Los Angeles), and Philadelphia stock exchanges.


Stock Indexes and Averages


There are several useful measures of value changes in representative stock groupings. A sampling includes:


The Dow Jones Industrial Average (DJIA, or the Dow)—An average of 30 major stocks that many use as a reflection of overall stock market action.


Standard & Poor’s 500 Index (S&P 500)—A broad-based measure of market activity based on the performance of the stocks of 500 of the largest companies.


National Association of Securities Dealers Automated Quotations Composite Index (NASDAQ Composite Index)—An average of the trading in approximately 5,000 over-the-counter stocks not traded on exchanges.


Other commonly used measures include the NYSE Composite Index, the Russell 2000 Index, and the Wilshire 5000 Equity Index.



Decoding the Tables


For an understanding of stock table coding, here are some helpful definitions:


52 Weeks/Hi Lo—Highest and lowest prices reached over the previous 52 weeks, but not including the latest day’s trading.


Stock—Each stock is listed in alphabetical order by full or abbreviated name. Local stocks are sometimes printed in boldface type.


Sym—Stock symbols (trading symbols) of one to five letters used to identify companies on the securities exchange or other market on which they trade.


Div—Annual dividend per share, based on the most recently declared dividend.


Yld %—The stock’s dividend yield determined by dividing the annual dividend by the trading day’s closing price. 


PE—Price-earnings ratio of the trading day’s closing market price to earnings per share over the most recent four quarters.


Vol 100s—Total daily shares sold volume, quoted in hundreds (two zeros omitted).


Hi Lo Close (or Last)—Highest, lowest, and last price at which the stock traded on the trading day.


Chg (or Net Chg)—Change from previous day’s closing price to this trading day’s closing price, normally quoted in eighths of a point (which was changed to a decimal system beginning in 2000).


It is helpful to look for explanatory notes regarding the coding used on Highs, Lows, Dividends, PE ratios, or other topics. You will also find figures of total daily volume and most actively traded stocks for each major national market and the performance of various stock indexes.


As you read the financial pages regularly, you will become more “fluent” in “Wall Street Speak,” a language that will help you gain knowledge about the world of investments.


Understanding IRA Minimum Distribution Requirements

Many people who have been contributing to Individual Retirement Accounts (IRAs) for years have watched their account balances grow through tax-deferred accumulation. However, did you know the Tax Code mandates that contributions to traditional IRAs are no longer permitted after reaching age 70½ and required minimum distributions (RMDs) must commence no later than April 1 of the year after the year in which you reach age 70½?

Let’s take a look at the following example. Suppose Bob’s 70th birthday was July 15, 2017 and he attained age 70½ on January 15, 2018. Bob will have until April 1, 2019 (the year after reaching age 70½) to begin taking distributions.

It is important to note: The first RMD is actually for the year in which you attain age 70½; however, you are allowed to postpone it until April 1 of the following year. For every year after the first distribution, the RMD must be taken by December 31.

At first glance, postponing the first RMD may seem like a good idea because you can gain additional tax deferral. However, a second RMD would be due by December 31 of the same year (i.e., that year’s required distribution). Not only would this substantially increase your taxable income, but it could also limit some deductions based on adjusted gross income (AGI) and possibly subject your Social Security benefits to taxation.

Consequently, some people find that it makes sense to take the first RMD in the year when age 70½ is reached, rather than to postpone and “double up” the following year.     

Calculating the Distribution

Each year, the RMD amount is be calculated by dividing the IRA balance, as of December 31 of the previous year, by the applicable life expectancy factor from the appropriate IRS table. If an individual has more than one IRA account, the RMD amount must be calculated according to the total balance in all accounts. However, the amount can be taken out of any one (or more) IRA account. For each subsequent year, the RMD amount must be recalculated.

It is important to note: If you fail to withdraw the RMD amount for each year, you may be subject to a penalty tax. This tax is 50% of the difference between the amount actually withdrawn and the amount required to be withdrawn (i.e., the minimum distribution shortfall).

IRAs continue to be valuable vehicles for retirement planning. However, the time of reckoning (i.e., mandatory withdrawals) may be approaching for many IRA owners. Knowledge of the rules may help avoid potential tax problems. Be sure to consult a qualified tax professional for advice specific to your unique circumstances. 

Time to Reassess Your Portfolio?

Market swings often prompt investors to reassess their portfolios. As you evaluate the efficacy of your investments in light of your financial goals, it’s important to revisit two key principles—asset allocation and diversification. Any long-term investment plan will most likely have to weather market “ups” and “downs.” Softer markets often create opportunities for purchasing shares at lower prices, and through dollar cost averaging, you may be able to average a lower cost per share over time. Maintaining a regular investment program and balancing your portfolio to account for a comfortable risk level are important to the overall success of your financial strategies.   

Asset Allocation and Diversification

The main objective of asset allocation is to match the investment characteristics of the various asset categories (equities, bonds, cash, etc.,) to the most important aspects of your personal investment profile—that is, your risk tolerance, your return and liquidity needs, and your time horizon. Asset categories generally react differently to economic fluctuations.

If you have assembled an unplanned investment medley, you may be unaware of the extent to which your investments are (or are not) consistent with your objectives. Since various investment categories have unique characteristics, they rarely rise or fall at the same time. Consequently, combining different asset classes can help reduce risk and improve a portfolio’s overall return. While there is no set formula for asset allocation, guidelines can help you accomplish certain goals (for example, the need for growth in order to offset the erosion of purchasing power caused by inflation).

Diversification is an investment strategy used to manage risk for your overall portfolio, using techniques such as mixing your holdings to include a variety of stocks (small-cap, mid-cap, and large-cap), mutual funds, international investments, bonds (short- and long-term), and cash. By varying your investments, diversification attempts to minimize the effects a decline in a single holding may have on your entire portfolio. 

Dollar Cost Averaging

To maintain a regular investment program, many investors make dollar cost averaging an integral part of their overall savings plan. Using this systematic investing technique, an investor buys more shares when prices are low, and fewer shares when prices are high. This may result in a lower average cost per share than if you were to purchase a constant number of shares at the same periodic intervals or make a single investment. 

Dollar cost averaging cannot guarantee a profit or a lower cost per share, nor can it protect against a loss. However, it is a strategy that reinforces the discipline of regular investing and offers a systematic alternative to “market timing.” In order to take full advantage of dollar cost averaging, you need to consider your ability to continue purchases through periods of low price levels.

Periods of falling prices are a natural part of investing, as are strong market intervals. It is important to regularly review your portfolio to help ensure your investing strategies remain aligned with your financial objectives.

Thinking Ahead for a Secure Retirement

Since Americans are now living longer than ever before, many into their 80s, 90s, and more commonly over 100,  retirement resources may need to last 30 years or more.

Nearly everyone has financial challenges of some sort. As a result, many put off planning for the future.

Some people assume that Social Security will take care of them when the time comes. Then, when they reach retirement age, they find that Social Security will not provide enough income to maintain the quality of life they enjoyed during their working years.

In past decades, many retirees depended on pension plans to provide a major portion of retirement income.

However, current trends find businesses offering more defined contribution plans, which rely on employee contributions, and fewer defined benefit plans. In addition, acquiring sufficient retirement resources to last has turned into a necessity in an unpredictable economic landscape.

Today’s retirees may require 60% to 80% of their pre-retirement income in order to maintain their current lifestyles during non-working years.

What about inflation? Living expenses are likely to cost more in the future, because over time, the purchasing power of the dollar generally decreases as a result of inflation. Therefore, it’s important to factor inflation into your retirement plan. Remember, it’s never too early to start saving for your retirement.

When thinking about retirement, consider the following three steps:

1) Set your retirement goals.

2) Determine your sources of retirement income.

3) Devise strategies to address any shortfall and manage your money in retirement.

Determining how much income you will need at retirement and deciding among various savings options are the keys to your long-term success. 

If you need help with this supremely important calculation, we can help!

Schedule your free retirement strategy session here. 


Should You Choose Traditional IRA or Roth IRA?

Currently, there are two popular Individual Retirement Accounts (IRAs) vying for your attention: the traditional IRA and the Roth IRA. While both are long-term savings vehicles with tax benefits, each has different rules concerning contributions, age, and income that may change from one year to the next.


Perhaps the biggest difference between traditional IRAs and Roth IRAs is how and when taxes apply to the contributions and earnings. Contributions to traditional IRAs can be pre-tax (deductible on the taxpayer’s income tax return). Although contributions and earnings accumulate on a tax-deferred basis, income taxes are due when IRA distributions are taken. On the other hand, contributions to Roth IRAs are made with after-tax dollars, and contributions and earnings accumulate tax free. No income tax is due when distributions are taken from a Roth IRA. For tax year 2018, the maximum contribution to either a traditional IRA or Roth IRA is $5,500 ($6,500 for individuals age 50 or older).

Age Restrictions

Contributions to traditional IRAs may be made in the years in which an individual receives compensation prior to attaining age 70½. Required minimum distributions (RMDs) must begin by April 1 of the year after an individual reaches age 70½ (or a considerable tax penalty may apply). In contrast, Roth IRAs have neither an age limit for contributions nor minimum distribution requirements. However, both traditional and Roth IRAs have a minimum age for distributions: 59½. Distributions taken prior to age 59½ may be subject to a 10% Federal income tax penalty. Certain situations qualify as exemptions, such as distributions to pay first-time-homebuyer expenses or qualified education expenses. Furthermore, before tax-free distributions can be received from a Roth IRA, the account must be five years old.

Income Eligibility Limits

Depending on your tax-filing status, your income, and whether or not you participate in a qualified employer-sponsored retirement plan, you may be eligible to take an income tax deduction for contributions to a traditional IRA. If you are a single taxpayer, do not participate in a qualified employer-sponsored plan, and earn a minimum of $5,500, contributions are deductible regardless of your adjusted gross income (AGI). However, if you do participate in an employer-sponsored retirement plan, income limits apply. Deductions in 2018 phase out for single filers with modified AGIs (MAGIs) between $63,000 and $73,000, and for married couple joint filers with MAGIs between $101,000 and $121,000.

The income eligibility requirements are different for Roth IRAs. If you participate in a qualified employer-sponsored retirement plan, you may contribute to a Roth IRA; however, if you are also contributing to a traditional IRA, your contributions may not exceed the annual contribution limits. You are eligible to make a full contribution to a Roth IRA if your MAGI in 2018 does not exceed $135,000 for single filers or $199,000 for married joint filers (contributions phase out for single filers with MAGIs between $120,000 and $134,999, and for married joint filers with MAGIs between $189,000 and $198,999).

A Roth IRA is often a favored choice for those who participate in a qualified employer-sponsored retirement plan and exceed the income limits for a deductible IRA, but who meet the income eligibility requirements for a Roth IRA.

Analyze This

As you investigate which IRA—or combination of IRAs—offers you the best bottom line, you may want to consider the following questions:

  • What tax benefits, current and long-term, are available to you?
  • Would you like to make contributions beyond age 70½?
  • When do you anticipate needing your IRA proceeds?

An analysis of your personal financial situation and retirement objectives with a qualified financial professional can help you develop a financial strategy to meet your specific needs. Scrutinizing the details now may save you time and money in the future.