Pension vs. 401(k)

Given a choice, which would you choose: a guaranteed fixed income for the rest of your life, or a lump sum that you could invest? As it turns out, lots of people prefer a sure thing.

 

This is what a recent survey showed about public sector employees posed with the option to select a defined benefit pension plan or a 401(k)-type defined contribution individual account. In fact, even when the defined contribution plan was the default option and workers had to proactively choose the defined benefit pension plan, they made the effort. In the eight states studied that offered a choice between the two options, all had employees choosing pensions at rates of 75 percent or higher in 2015.

 

If there’s one thing this survey can tell us, it’s that people are paying attention. Most people don’t have unrealistic expectations about stock market outperformance, “getting rich” and retiring early. Many people remember what the recession was like and want to be better prepared should it happen again – particularly during retirement.

 

A MetLife survey recently revealed that 21 percent of retirement plan participants who opted to receive their pension or 401(k) assets as a lump sum depleted that money, on average, in less than six years. Among those given only the option of a 401(k), who took a lump sum, their money ran out in an average of four years.

 

Employer-sponsored pensions aren’t that common anymore, but you don’t necessarily need one. It’s possible to reposition a portion of the assets from a retirement plan and create your own guaranteed income stream with an annuity; the guarantee is backed by the financial strength of the issuing insurance company. We can help you determine if an annuity is right for you. Please contact us to schedule a consultation.

 

Even employees who have a pension plan may not get the retirement income promised because many pensions are now underfunded. This is particularly true of private, multi-employer pension funds. These are funds typically created by labor unions and cover industries where people often work for multiple employers in a year, such as trucking or construction.

 

Many of these funds have had difficulty recovering losses since the recession because the employees also work in declining industries such as manufacturing. When pension plans don’t have enough money to pay out the income they’ve promised, sometimes they go bankrupt or pay reduced amounts. To give you an idea of how many private multi-employer pension plans are currently underfunded, according to one report, it would take $76 billion to shore up the ones on the brink of insolvency.

 

Single-employer pension plans appear to be in better shape. Their maximum pension guarantee from the government’s Pension Benefit Guaranty Corporation, should their plan fail, is $65,045 a year versus a multi-employer plan guarantee of $12,870 a year for union plan workers with 30 years of service.

 

Though many employees may still prefer a pension over a self-directed 401(k) investment plan, today’s pensions are not as generous as they were in the past. Many involve higher retirement and benefit-vesting ages, longer work periods to qualify, lower payout percentages and smaller inflation adjustments once payouts begin.



Ray Lantz

Raymond C. Lantz, Jr. is the president and founder of USA Wealth Group, Inc. Ray has many years of experience advising clients in retirement and sophisticated tax planning strategies, multi-family and commercial real estate projects, and legacy planning. Ray is a graduate of Clark University, holds a law degree from Boston College, and a master of laws in taxation from Boston University. You can hear him every Sunday on Money Wise with Ray Lantz on WBSM 1420AM or on the Radio Pup app. 


Interested in reading more?  Here are some articles that may be of interest to you:  

Public Employees Choose Pensions

The Retirement Choice Causing Some To Run Out Of Money

What happens when your pension fund runs out of money

Some Union Retirees Could See Pension Benefits Cut 90%, PBGC Chief Warns

Pension cuts getting steeper for state and local governments

 

Annuities are insurance products that may be subject to fees, surrender charges and holding periods which vary by company. Annuities are not a deposit of nor are they insured by any bank, the FDIC, NCUA, or by any federal government agency. Annuities are designed for retirement or other long-term needs.

We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions. If you are unable to access any of the news articles and sources through the links provided in this text, please contact us to request a copy of the desired reference.

 

                                                         

Where Americans Stand on Personal Debt

On one hand, low interest rates are good for those borrowing money. On the other hand, easy cash can lead to excess debt -- a place far too many Americans find themselves.  

Today, the median credit card debt is $2,000 per person, the median student loan debt is around $9,000 and the median mortgage debt is just less than $60,000. Concerningly, today’s pre-retirees appear to be carrying more debt and are less financially secure than pre-retirees 25 years ago.

One of debt’s biggest disadvantages is that it can hamper savings efforts. It’s difficult to spread discretionary income between savings and debt, and difficult to get ahead if you’re constantly making high payments on loans. Insurance can potentially help in a couple of ways. First, through the use of an annuity, it’s possible to use a portion of your current retirement assets to help create future retirement income, allowing you to use your current income to help pay off debt.

Second, life insurance policies with a death benefit provide an extra layer of financial confidence for loved ones, helping to pay off any debts should you pass away before they are paid. If you would like to discuss insurance options related to your current debt load and long-term retirement income goals, please give us a call.

Studies show that more than a third (38 percent) of Americans use their tax refunds to help pay off debt. This may be a good plan, since it often can be difficult to make extra payments toward debt when you’re on a tight budget. However, it’s also a good idea to try to balance your tax withholdings to match your tax liability by the end of the year. In doing so, you may be able to squeeze out some extra income each month to apply toward debt.

One way people may fall into debt is through medical expenses. As high-deductible health plans and co-insurance policies rise in popularity, even those with coverage can find themselves with insurmountable health care bills. Interestingly, while we might associate medical debt with older people who tend to have more serious health conditions, it turns out that the millennial generation tends to rack up more medical debt than other demographics.

One in six Americans say they’ve had past-due medical bills show up on their credit report, even though 53 percent of those bills are less than $600 each. Physicians and hospitals, unlike traditional lenders, typically do not directly report unpaid bills to credit reporting agencies. These bills only affect your credit score when reported by a collection agency, so it’s important to negotiate a payment plan with the medical provider so that the debt doesn’t move into collection procedures.

Another credit report misperception: Carrying a balance will improve your credit score. Instead, you can improve your score by using a credit card and paying the balance off on time each month.

One strategy to help budget your money and pay off bills is the 50-20-30 rule, which allots 50 percent of your income for needs, 30 percent for wants and 20 percent for savings. Here is a further breakdown of how to allocate available after-tax income:

  • 50% -- rent/mortgage, food, bills, minimum debt payments and other essentials

  • 30% -- dining, entertainment, etc.

  • 20% -- savings, investment, etc.

 Interested in reading more?  Here are some articles that may be of interest to you:

The No. 1 thing Americans plan to do with their tax refund

Debt and Financial Vulnerability on the Verge of Retirement

Millennials rack up the most medical debt, and more frequently

What Medical Debt Does to Your Credit Score

Millions of Americans Make a Costly Mistake When Paying Credit Card Bills

How the 50-20-30 rule can help you get out of debt and save money

 

Odds for Divorce

Every couple who decides to marry runs some risk of divorce in the future. The only way to definitively avoid divorce is to remain single, but plenty of people are willing to take their chances.

Among the many unintended consequences of divorce is the toll it can take on a couple’s finances. Of divorced women, 46 percent reported in an online survey that divorce brought with it financial surprises. Those included having no idea how much the household carried in debt, such as mortgages, auto loans, 401(k) loans, student loans and credit cards. Many assumed their child support and/or alimony would be more substantial or last longer; that they would be able to keep the family home; or that they wouldn’t have to return to the workforce.

As for the cost of actually filing for divorce, here are some averages from a nationwide survey by legal site Nolo.com:

·         $250 per hour for a divorce attorney

·         $6,000 to $7,000 for divorce mediation

·         $175 to $700 for legal document preparation (for an uncontested divorce)

·         $200 to $500 for online divorce services (paperwork assistance without court filing)

·         $12,800 average spent on divorce per couple

While it’s always advisable to have legal assistance during a divorce, that’s not the only advice you should seek. Both spouses should work with a financial professional to understand the combined household assets. It’s important to consider things like withdrawal accessibility, tax liabilities and early withdrawal penalties. Also, it’s best to view finances from a “big picture” point of view instead of a single asset at a time, including insurance resources. Let us know if we can help you with any questions you might have about your insurance policies.

Of course, the best way to avoid the expense and hassle of divorce is not to get one. Recent studies have revealed some interesting statistics related to marriages that end in divorce, which couples may wish to consider when planning their nuptials.

For example, statistician Nathan Yau tracked divorce rates by profession, using U.S. Census data, and found that people in certain professions have a greater likelihood of divorcing, while others are less likely to end up there. Actuaries are the least likely to get a divorce -- presumably because of their experience predicting risk and managing uncertainty -- according to Yau’s analysis. Other professions with lower divorce rates include scientists, clergy, software developers and physical therapists. Professions with the highest divorce rates include casino managers, bartenders and flight attendants.

Another study found that couples can reduce their chances of divorce in the wedding planning phase. For instance, a marriage has the best chance of lasting when the couple:

·         Spends less money on the engagement ring (less than $2,000)

·         Spends less money on the wedding – weddings costing less than $1,000 have a better chance than those costing more than $20,000

·         Goes on a honeymoon

·         Does not let their partner’s physical appearance factor into their decision to marry

Interestingly, more divorces are filed in March and August than any other months. Some theorize that couples don’t want to spoil the holiday season or summer vacation by announcing their intentions. Besides, some couples believe that spending more family time together during those holidays may help save the marriage.

 

Interested in reading more?  Here are some articles that may be of interest to you:

The 6 Nasty Financial Surprises For Divorcing Women

The Average Cost of Divorce and 5 Major Financial Mistakes to Avoid

The occupations with the highest and lowest divorce rates in the US

Couples Who Spend More on Their Weddings Are More Likely To Divorce, Study Finds

New Study Shows Most Divorces Happen in These Two Months

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Raymond C. Lantz, Jr. is the president and founder of USA Wealth Group, Inc. Ray has many years of experience advising clients in retirement and sophisticated tax planning strategies, multi-family and commercial real estate projects, and legacy planning. Ray is a graduate of Clark University, holds a law degree from Boston College, and a master of laws in taxation from Boston University. You can hear him every Sunday on Money Wise with Ray Lantz on WBSM 1420AM or on the Radio Pup app. 

Annuity Strategies

In a 2017 Nationwide Retirement Institute survey, financial advisors revealed some of the primary concerns of today’s pre-retirees, including maintaining their current lifestyle during retirement. These people also are less concerned with growing their assets; instead, they are focusing on drawing them down in a disciplined strategy without taking out too much too early -- and potentially running out of money. This often means transferring assets out of high-risk investments and putting them into more income-oriented vehicles.

With this in mind, annuities have become a popular go-to strategy for a portion of a retiree’s nest egg. With an annuity, you can determine how much money to use to purchase an annuity contract based on how much income you’ll want to receive from that source during retirement. Annuities can also provide a steady and reliable income stream, which is very helpful in retirement planning. It’s important to remember that annuities are designed for long-term needs and that they may be subject to fees, surrender charges and holding periods, which vary by company.

Because annuities are insurance products that require understanding, it’s a good idea to work with an experienced financial advisor to determine which type of contract best suits your particular needs. It can become your personal income stream, wherein you decide how much money to commit now for a guaranteed income in the future. Also, be aware that an annuity income stream is guaranteed by the financial strength of the issuing insurer, not the government. As always, we’re here to help you evaluate whether an annuity is appropriate for your situation.

The good news is that today’s annuities offer a wide spectrum of features and benefits to help customize your income stream. For example, some offer riders that provide payout options for a terminal illness, chronic care, disability and even unexpected unemployment. Some annuities guarantee a return of your premium. These riders are generally optional and may require an additional fee, and they may not be available on all products.

Another way to benefit from an annuity is to use it as a wealth-transfer vehicle. For example, fixed annuity income isn’t taxed until it is distributed. If you preselect a payment stream for a loved one, he or she can receive the income throughout a period of time to avoid a large tax liability as the result of a one-time, lump-sum death benefit.

Because they offer options for reliable lifetime income, annuities remain a popular option when creating an income plan for retirement assets. The following are some recent insights discovered by LIMRA Secure Retirement Institute’s 2017 Annuity Buyers Metrics study.

  • Annuities appeal to pre-retirees and retirees by addressing three major retirement income goals: asset accumulation, preservation of principal and predictable retirement income.

  • Individuals typically buy a guaranteed income annuity at or in retirement when they are at the peak of their income years or accumulated assets.

  • 80 percent of retiree households (with an annual income of at least $35,000) that own an annuity have more than $100,000 in investable assets.

Interested in reading more?  Here are some articles that may be of interest to you:

CLICK HERE TO READ THE ARTICLE “Using Annuities To Prep Clients For The Next Recession.”

CLICK HERE TO READ THE ARTICLE “Annuities Can Help Boomers Consider Wealth Transfer Plans.”

CLICK HERE TO READ THE ARTICLE “Buyers Look Past Marketing and Buy the Annuity’s Purpose.”

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Raymond C. Lantz, Jr. is the president and founder of USA Wealth Group, Inc. Ray has many years of experience advising clients in retirement and sophisticated tax planning strategies, multi-family and commercial real estate projects, and legacy planning. Ray is a graduate of Clark University, holds a law degree from Boston College, and a master of laws in taxation from Boston University. You can hear him every Sunday on Money Wise with Ray Lantz on WBSM 1420AM or on the Radio Pup app. 

Prescription Drug Trends

A gene therapy treatment recently approved by the Food and Drug Administration for use against leukemia is priced at $475,000 for a one-time treatment. While it’s exciting that new treatments, including prescription drugs, appear to be getting closer to curing society’s most lethal diseases, many of us wonder how we can afford them. Even when such treatments are covered by insurance, the pool of insured participants pay the cost in terms of higher premiums.

The way drug manufacturers determine pricing has become a controversial topic. In the past, the average cost to bring a new drug to market was reported to be around $2.7 billion. However, a new study on cancer medications has arrived at a much lower number: a median cost of $757 million per drug, with half costing less and half costing more. Drug companies dispute the study, saying the cost doesn’t take into account research and development investments made in drugs that fail.

Meanwhile, health care costs continue to rise, with the average family health insurance plan rising 3.4 percent in 2016 from 2015, outpacing wage growth. Even in retirement, when most people qualify for Medicare benefits, health care expenses can be high. Recent estimates project that a healthy, 65-year-old couple retiring this year will need $275,000 to cover their health care expenses in retirement. This sum includes paying for Medicare premiums, cost-sharing provisions and out-of-pocket costs, but when you add in over-the-counter medications, dental services and potential long-term care, that figure could be even higher.

Do you have a strategy in place to help pay for health care expenses in retirement? If not, give us a call. Some insurance products such as life insurance and annuities provide various options you may want to consider. We’d be happy to discuss your options based on your unique situation.

As for tackling the issue of high drug prices, states are taking the matter into their own hands. California recently passed legislation mandating transparency related to how the pharmaceutical industry sets drug prices in that state. In April, New York passed a law that requires prescription drug companies to undergo a review when prices rise and discounts and rebates aren’t offered back to the state for rising Medicaid drug spending. Nevada’s legislation more specifically requires a drug pricing process for diabetes medication. The state of Vermont has had a law on the books since 2016 in which drugmakers must provide justification for pricing hikes or they risk being fined.

Meanwhile, another way to tackle the high cost of prescription drugs could be to introduce a major volume player into the mix – Amazon reportedly has been considering entering the prescription drug market. The pricing power that Amazon wields was enough to drive down the price of CVS and Walgreens stock by nearly 5 percent when a report predicting a potential Amazon move was first announced.

Interested in reading more?  Here are some articles that may be of interest to you:

CLICK HERE TO READ THE ARTICLE “Revolutionary gene therapy approved for leukemia – at $475,000 price tag.” 

CLICK HERE TO READ THE ARTICLE “What Does It Cost to Create a Cancer Drug? Less Than You’d Think.”

CLICK HERE TO READ THE ARTICLE “Employers push health care costs onto workers.” 

CLICK HERE TO READ THE ARTICLE “Expect to spend more on health care in retirement — even if you’re well.” 

CLICK HERE TO READ THE ARTICLE “California just passed a new law that tackles the rising cost of prescription drugs.”

CLICK HERE TO READ THE ARTICLE “New York State Wants Its Prescription Drug Money Back – Or Else.”

CLICK HERE TO READ THE ARTICLE “‘More is possible’: A bunch of states are taking on high drug prices, and it could start hitting drugmaker profits.”

CLICK HERE TO READ THE ARTICLE “Are prescription drugs the next target for Amazon?” 

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Raymond C. Lantz, Jr. is the president and founder of USA Wealth Group, Inc. Ray has many years of experience advising clients in retirement and sophisticated tax planning strategies, multi-family and commercial real estate projects, and legacy planning. Ray is a graduate of Clark University, holds a law degree from Boston College, and a master of laws in taxation from Boston University. You can hear him every Sunday on Money Wise with Ray Lantz on WBSM 1420AM or on the Radio Pup app.