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Category: Retirement Planning

Outliers And Retirement Income

[ 0 ] April 23, 2014

Spectrum Financial Solutions, FL, Retirement PlanningYou are age 65 and it’s your first day of retirement. You are about to tap a putt into the ninth hole. Based on your experience, you believe you will sink the putt.

Just to make it interesting, let’s make a little bet. If you sink the putt, you are guaranteed that you can take out an ever-increasing amount of money from your retirement assets and you’ll never run out of money in retirement—even if you live past age 100. However, if you miss the putt and the ball winds up on a completely different fairway, your money runs out before you’re age 80. Do you take the bet?

Wall Street makes a lot of investment projections calculating sustainable rates of withdrawal in retirement. Depending on the mix of stocks and bonds—and the initial withdrawal rate used—these predict that the invested money will last at least 30 years 90, 94 or 98 percent of the time. In golf terms what the projections are saying is you can move your ball closer or farther from the pin to wherever you think you’re pretty sure you could sink it, and the farther you go back from the hole, the larger the withdrawals promised. Essentially you are controlling the risk and the game because it is your decision on how much to withdraw and how to invest guided by the Wall Street model.

Let’s go back to the golf course and consider this: Unbeknownst to you, a hawk has mistaken the ball for prey and will swoop it up before it hits the hole, or a miss-hit ball from the adjacent fairway is arcing toward your green, smashes into your ball and sends it ricocheting onto the next fairway. In both cases you have lost your bet, and instead of enjoying a long and prospering retirement you will experience one with financial hardships.

We have all heard of black swans—disruptive events that cannot be predicted—but the situations mentioned above are not black swans because they could be predicted. The hawk and the ricochet are outliers in that they were possible, but extremely unlikely. Unfortunately, almost all retirement income models simply ignore outliers—therefore, retirees should not.

The 4 percent inflation-adjusted portfolio withdrawal rate assumed a 50/50 mix of stocks and bonds and provided a 94 percent confidence level that it would last at least 30 years; however, it also assumes that the long term returns of stocks and bonds continues into the future. Instead, if we assume that this current low-bond yield environment hangs on for a decade before rates return to their historic “norm,” our confidence in the retirement money lasting 30 years drops to 68 percent, and if bond yields never recover, our confidence in producing that 4 percent payout rate drops to 43 percent.1

The previous example looked at an outlier of very low bond rates. Sequence of returns risk means starting withdrawals during a period of losses. This risk is not an extreme outlier, because the bear markets of the 1970s showed what could happen. Yet it wasn’t until after we had two severe bear markets within eight years of each other that Wall Street considered reducing the suggested levels of sustainable withdrawals below 4 percent.

Another outlier is if a medical breakthrough in longevity results, where living to age 100 or 105 becomes commonplace; to get retirement income confidence levels over 90 percent would require investment portfolio withdrawals to drop below 2 percent.

If any of these three outliers occur, the options are to save much, much more for retirement (impossible for one already at retirement age); to withdraw much, much less; or to die early.

Another way is to transfer the risk of these outliers to a third party—an annuity carrier.

A guaranteed lifetime income—whether it comes from an income annuity, a deferred income annuity or a lifetime withdrawal benefit—provides protection from retiring at the wrong time, living too long or earning too little. It assures that whether you sink your putt or not, you can go on with your game.

A guaranteed annuity income won’t help if the world gets destroyed by an asteroid, nor will it stop someone who chooses playing slot machines as their new retirement activity. However, when it comes to retirement income, fixed annuities lower the risk from many outliers and eliminate others. Perhaps the biggest risk with fixed annuities is that retirees won’t learn about them until it is too late.


 1. “The 4 Percent Rule is Not Safe in a Low-Yield World,” Finke, Wade and Blanchett, January 2013,

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Understanding Your Own Investment Risk Tolerance

[ 0 ] April 9, 2014

Spectrum Financial Solutions, FL, RisksMost people, once they get safely past their teenage years, have a pretty concrete list of risks they don’t care to take.

Skydiving, for instance, is either on your bucket list or not. After a certain age, you’re either itching to do it or itching to avoid it.

While we tend to get better at assessing risk as we get older, we don’t seem to learn as much about financial risk. In the markets, we seem to be perpetual teenagers, always stepping in too deep for our own good.

Unless the market moves against us once, hard. Then the opposite tends to happen. We get over-concerned about risk to the point that we stop investing completely.

Understanding where you are on this curve is important. If you take too little risk as a young investor, you might leave a lot of money on the table. Failing to realize the advantage of time means your money compounds at a lower rate or not at all. That’s very hard to overcome later in life.

The late saver then tries to do exactly that — to turn back the clock and make up for missing time. That investor then tends to take on too much risk for his or her own good, always pushing the envelope on their investments.

A few early successes is even worse. It’s easy to become convinced of your own investing acumen and to then confuse skill with blind luck. Until, of course, the luck runs out. Even then, we tend to blame the markets, or the government, or the banks, anyone but the person making the actual investments — ourselves.

How can you learn your own risk tolerance? It’s not that hard, really. Here are four basic questions any financial advisor would ask:

1.      How long until you need this money?

If you have 30 years to save and invest, it’s likely that you can handle a few market setbacks along the way. This assumption changes a lot if you are just five years away from retirement.

2.      How long do you expect to work? To live in retirement?

Many people get to retirement age unready to quit working or unable to do so, having saved too little. If work is part of your retirement plan, you might be able to take on a little more risk than most investors your age. Also, consider how long you might live in retirement. Running out of money in your later years is an avoidable outcome.

3.      How do you react when markets go up?

Joy? Champagne? Shopping sprees in celebration? Remember that you haven’t actually made any money until you sell those assets, and that might not be for decades to come. Likewise, some investors take a rising market as a sign to invest more heavily, even if stocks seem expensive.

4.      How do you react when markets go down?

Dread? Depression? Fear? Remember, you also haven’t lost any money unless you sell at a bottom. Likewise, investors tend to avoid investing as stock prices fall, which is contrary to the whole concept of “buy low and sell high.”

Correctly measuring investment risk tolerance is an important part of the any long-term retirement plan. Get it right, and you can insulate yourself from the kinds of emotional trading mistakes that plague retirement savers.

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7 Alternatives to Investing in the Stock Market

[ 0 ] March 5, 2014

Spectrum Financial Solutions, NJ, InvestmentThe stock market is a great investment if you have a long time horizon.  But should you continue to invest in stocks once you retire?  When you start withdrawing from your retirement portfolio, you will be a lot more sensitive to stock market fluctuations.  Most financial advisers recommend reducing stock market investments as you get older, but you don’t want to just stick the money under the mattress either.  Inflation will erode cash savings over the years, and we need to continue to invest.  Here are seven investment alternatives to the stock market:

Annuities.  There are many types of annuities, but the basic idea is that we pay an insurance company a lump sum in exchange for a guaranteed monthly payment for life.  Annuity payouts are primarily tied to interest rates, so it’s probably a good idea to wait until rates improve.  You probably don’t want to put all of your savings into an annuity because you really don’t know how long you will live.  If your pension and Social Security payments aren’t enough to pay your minimal monthly expenses, then it’s a good idea to buy an annuity to fill that gap.

Bonds.  The classic alternative to the stock market is bonds.  You can lend money to the government or a corporation and receive some interest.  When the stock market goes south, investors turn to bonds as a good diversification from the stock market.

CDs.  CDs are not very attractive at the moment because the yields are very low. However, the return is guaranteed and the risk is also very low. Building a CD ladder is a good way to guarantee stable returns. Once interest rates improve, it will be a good idea to invest in a long-term CD.

Real estate.  Rental properties are a great way to generate some income, but they can be a lot of work. If you don’t want to deal with tenants, then a property management company can be a huge help.  If you really don’t want to be a landlord, consider a real estate investment trust (REIT) instead.  Investing in a REIT is much easier than owning rental properties, and the dividend payout is usually very good compared to other dividend stocks.

Gold.  Gold is another diversification from the stock market.  When economic turmoil hits, the price of gold goes up.  Gold represents stability, and a small portion of your portfolio might benefit from that.  Investing in gold is easier than ever.  You can invest in gold ETFs without having to worry about stashing gold jewelry in the freezer.

Peer-to-peer lending.  Peer-to-peer lending is a great way to generate extra income.  You lend money to individual borrowers and you’ll be paid an interest rate.  The good thing about peer-to-peer lending is that you can lend in $25 increments and diversify your lending portfolio.  Some percentage of borrowers will default, but your lending portfolio should be able to handle some losses because the interest rate is so high.  One big caveat is if we have a big recession and many people lose their jobs, then the default rate will skyrocket.

Long-term care insurance.  The cost of long-term care can put a big dent into any retirement portfolio.  A good nursing home can cost over $10,000 a month depending on where you live.  Long-term care insurance can offset that cost.  If your family has any history of Alzheimer’s, dementia, or Parkinson’s disease, long-term care insurance might be right for you.  However, the cost of long-term care insurance is quite high, so if your family doesn’t have any history of needing long-term care, it might be better to invest the money elsewhere.

Retirees shouldn’t pull out of the stock market completely because it is still a great investment over the long term.  Retirement can last over 30 years, and we need some growth in our retirement portfolio.  However, retirees need to take a close look at their portfolio and ask themselves if they can handle the volatility.  Most people think they can handle a big drop in the stock market, but when it happens, they often sell at the wrong time and lose out on the recovery.  Choosing some alternative investments outside the stock market may bolster your finances during such an event.

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Privately Financed Graded Premium Universal Life

[ 0 ] February 5, 2014

Spectrum Financial Solutions, NJ, Life InsuranceCurrently, an arbitrage opportunity presents itself to sophisticated investors whereby interest bearing loans (interest paid currently and loans retired in less than ten years) made to a trust for the benefit of family members can create guaranteed Internal Rates of Return (IRR) that far exceed those available from most portfolio assets.  As the accompanying study illustrates, if trust assets grow at a modest 6% annual rate, the underlying trust will have grown terminal value to in excess of $16,145,000 in year 27 (the joint life expectancy of the hypothetical couple used in the study).

That equates to a 12.5% tax-free IRR for the trust assets (19.3% pre-tax).

This program is not a risk-less arbitrage.  Risk may be associated only with the trust’s ability to achieve annual growth of 6% during the loan period and longevity of the investors.  To the degree that growth rates fall below 6%, loans may be extended beyond 9 years and, correspondingly, IRR’s will not be as high as illustrated.  Additionally, because the trust matures upon the death of the investors, if the trust outlasts actuarial assumptions, IRR’s may be less than indicated above (see accompanying schedules).

This program is Internal Revenue Code (IRC) compliant.  Rates of interest charged to and paid by trusts using program are based on the Applicable Federal Rate (AFR) for mid-term loans and are published monthly.  Once established, loans will bear that AFR for the term of the loan.

Perhaps a successful individual is not interested in further estate planning. This approach understands that position and posits that the Privately Financed Guaranteed UL Program, aside from offering a superior investment experience, may enable investors’ unique opportunities to expand both charitable and non-charitable goals that previously weren’t possible or were deferred.

To Summarize:

Privately Financed Graded Premium Universal Life may be a solution to issues facing many successful investors and families today.  Through the use of a minimal risk arbitrage technique, estates can be secured, charitable gifts accelerated and a variety of other planning and/or investment goals satisfied very efficiently.

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Here we are!

[ 0 ] January 22, 2014

Spectrum Financial has made it more convenient for you to to reach us!  You can find us on our blog  LinkedIn page,  Facebook page, and of course our website.

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Grandchildren are often on the minds of those doing estate planning

[ 0 ] September 11, 2013

Spectrum Financial LLC, Grandchildren assetsGrandchildren are often on the minds of those doing estate planning; learn the best strategies for including them in your plan.

Similarly to planning the transfer of assets to your children, how you plan the transfer of your assets to your grandchildren will likely depend on whether they are adults or minors. Also, special needs children may need complete or supplementary financial support throughout their lives; as a grandparent, you may wish to contribute to that, as well.

Grandchildren may be subject to the generation skipping transfer (GST) tax, which is levied in addition to estate and gift taxes.

Additionally, paying for education may be a concern as grandchildren transition into adulthood and beyond. If you haven’t already placed assets in a 529 plan, Uniform Gifts to Minors Act (UGMA) account or Uniform Transfers to Minors Act (UTMA) account, doing so during your lifetime may be a strategic way to reduce the value of your taxable estate while working toward education savings goals.

If you have a 529 plan, you generally maintain control of the account until the money is withdrawn. Therefore, part of your estate planning might be to update the successor designation, which stipulates who will take over management of the account if you pass away.

And, as always, ensure your beneficiaries are up to date on other assets that have provisions for naming them, including investment and bank accounts with transfer on death (TOD) designations.

For minor grandchildren

If grandchildren are still minors, you may wish to help ensure they are provided for financially. Even if you have other assets you would like to pass to grandchildren, you may want to consider them when you choose your life insurance coverage. You might also want to plan to help cover the cost of college education through insurance, or to provide for grandchildren into adulthood, as well.

Trusts can be especially beneficial for minor children, as they allow more control of the assets, even after your death. By setting up a trust, you can state how you want the money you leave to your grandchildren to be managed, the circumstances under which it can be distributed, and when it should be withheld. You can also determine if your grandchildren will be able to control the money at a certain age as either co-trustees or full owners.


Trusts with distinct benefits for grandchildren

Generation-skipping trusts can allow trust assets to be distributed to non-spouse beneficiaries two or more generations younger than the donor without incurring GST tax.

Credit shelter trusts make full use of each spouse’s federal estate tax exclusion amount to benefit children or other beneficiaries by bypassing the surviving spouse’s estate.

Irrevocable life insurance trusts (ILITs) purchase life insurance policies to provide immediate benefits upon death that do not usually pass through probate.

A trust can also be an effective tool for transferring assets to an adult grandchild, while reducing estate taxes and allowing your influence on the assets even after you have passed away. A simple revocable trust or irrevocable trust may suit your needs, or you may want to consider one of the trusts with distinct benefits for grandchildren, listed at the right.

Retirement plans

Since only spouses have the option of rolling your retirement plan assets into their own IRAs, grandchildren will generally be required to begin taking minimum required distributions (MRDs) soon after your death based on their age—and to pay the associated income taxes.

Additionally, your retirement plan assets will be included in the federally taxable value of your estate. This results in estate tax liability when you pass away (unlike leaving the assets to a spouse, which allows you to take advantage of the unlimited marital deduction).

Although IRAs have no special provisions for naming grandchildren as beneficiaries, your options for grandchildren include:

  • Name grandchildren individually; if any pass away prematurely, the assets will be divided equally among the rest.
  • Choose “Per stirpes,” which means that if one of your children passes away before you do, their share will automatically go to their descendants.
  • Name grandchildren “contingent beneficiaries,” if, for example, you want to name your spouse as the primary beneficiary and your children are financially secure. If your spouse passes away before your IRA is transferred, then the assets would go to your grandchildren.

As always, if you want to name grandchildren as IRA beneficiaries, make sure your designations are up to date.

The rules for 401(k)s and other qualified retirement plans are similar to those for IRAs. If you are married and you want to designate beneficiaries—such as grandchildren—other than your spouse, you may need written consent from your spouse.

Otherwise, retirement plans follow roughly the same guidelines for what is taxable, but other features will vary from plan to plan. Contact the plan’s administrator for specific rules governing your plan.

Special needs grandchildren

For any grandchildren or other beneficiaries who may be unable to care for themselves as adults, you may want to help ensure they have the care and oversight they need for their lifetimes.

If they are unable to make a living for themselves, leaving them assets and making them beneficiaries of life insurance are both options. Trusts can be useful in either case, to help ensure the money is spent properly if they are unable to make spending decisions on their own.

Spectrum Financial Solutions

Spectrum Financial Solutions, LLC located in New Jersey and Spectrum Financial Solutions, LLC located in FL have been assisting individuals and businesses with their financial challenges for over 30 years.  With an emphasis on partnering with the right professional, we offer technical help and  specializations to meet your every need. Retirement Planning in FL, Tax Planning in NJ and Estate Planning in NJ are our successful hallmarks.

Need to know about Privately Financed Universal Life Insurance in FL? Call us today. Family Legacy Unitrust Edge in NJ has been created to help families establish lifetime legacies in a unique manner that simultaneously addresses social and family needs. We’d like to make sure you know more. Applicable Federal Rates in FL affect many of your planning tools.


George Klahre

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Only 46% of Americans have researched how much Life Insurance is needed

[ 0 ] June 16, 2013

Spectrum Financial SolutionsSource: Employee Benefit Research Institute, 2013

How much retirement income will you need? Should you refinance your mortgage? How much life insurance is enough? What type of IRA is right for you?

Spectrum Financial Solutions, LLC is a leader in helping people nearing retirement. There are tons of new regulations that you need to navigate through. Call us when you are ready to get some advice.


Spectrum Financial LLC, Florida

Spectrum Financial Solutions, LLC located in New Jersey and Spectrum Financial Solutions, LLC located in FL have been assisting individuals and businesses with their financial challenges for over 30 years.  With an emphasis on partnering with the right professional, we offer technical help and  specializations to meet your every need. Retirement Planning in FL, Tax Planning in NJ and Estate Planning in NJ are our successful hallmarks.

Need to know about Privately Financed Universal Life Insurance in FL? Call us today. Family Legacy Unitrust Edge in NJ has been created to help families establish lifetime legacies in a unique manner that simultaneously addresses social and family needs. We’d like to make sure you know more. Applicable Federal Rates in FL affect many of your planning tools.


George Klahre

Facebook | LinkedIn | Blog | Email