Do You Have Enough Income to Survive a Rainy Day in Retirement?

Everyone is familiar with the popular saying “April showers bring May flowers.” The arrival of spring also means the arrival of rainy weather. While rainy days are never fun, they signal the end of winter and the coming arrival of blossoming flowers and warmer weather. In retirement you might be able to avoid rainy weather by moving to a tropical climate.

Of course, you may not be able to avoid rainy days with regard to your financial strategy. Emergencies happen at all stages of life, including after you retire. Taxes could be a challenge and may stretch your budget. Medical expenses and long-term care costs could pose a financial threat. Market risk is always a concern.

One way to protect yourself from emergencies and unexpected costs is to boost your guaranteed* income in retirement. The more predictable, guaranteed income you have, the less vulnerable you’ll be to unplanned costs.

Not sure whether you have enough guaranteed income in retirement? Below is a three-step process you can use to evaluate your income and take action. If you haven’t projected your retirement income, now may be the time to do so.

Step 1: Establish your income floor.

Your income floor is the minimum amount of income you need to cover your most important expenses. The best way to determine your income floor is to develop a retirement budget. Granted, you can’t predict every cost you’ll face in retirement. However, you can probably make a reasonable projection based on your current expenses and your desired standard of living.

Highlight the expenses that are most important. These will include all your fixed expenses, which are the bills that have to be paid every month no matter what. You also may include a few discretionary costs, which are expenses that could fluctuate from month to month. For example, your most important expenses may include:

  • Housing
  • Utilities
  • Insurance premiums
  • Debt and credit card payments
  • Car payments
  • Medical costs
  • Food
  • Clothing
  • Cellphone bill
  • And more

Total up your most important expenses and see how much they cost on a monthly basis. Also, don’t forget inflation. It’s likely that prices will rise slightly between now and your retirement date. The sum of your most important expenses is your income floor. That’s the minimum amount of income you need each month to live in retirement.

Step 2: Project your guaranteed* income.

The next step is to project your guaranteed income in retirement. Guaranteed income is cash flow that will last no matter how long you live and that isn’t affected by market performance or other economic factors.

Social Security and pension benefits are good examples of guaranteed lifetime income. The amounts don’t fluctuate from month to month, and the income lasts for life. Distributions from 401(k) plans, IRAs or other investment vehicles may not be guaranteed, so you don’t want to include them in this calculation.

Add up your projected guaranteed income. Does it exceed your income floor? If so, you have enough to meet your bare minimum expenses. If it doesn’t, you may want to increase your guaranteed retirement income.

Steps 3: Fill in the gaps.

Ideally, you don’t just want your guaranteed income to match your income floor. You want it to exceed your income floor by a substantial amount. That way you can build a rainy day fund to cover life’s unexpected costs. Extra guaranteed income could help you pay for medical bills, home repairs or other emergency costs.

One effective ways to boost your guaranteed income is to include an annuity in your retirement strategy. Many annuities offer optional riders known as guaranteed minimum withdrawal benefits. These benefits allow you to withdraw up to a certain amount each year. As long as your withdrawal stays within the limits, the distribution is guaranteed for life. It doesn’t matter how long you live or how the market performs. Your income remains consistent and predictable.

Talk to a financial professional about how to use an annuity to boost your guaranteed retirement income. They can help you determine your income floor, project your retirement income and take action to protect yourself from financial rainy days.

Ready to boost your retirement strategy? Let’s talk about it. Contact us today at Sage Financial Partners. We can help you analyze your needs and implement a plan. Let’s connect soon and start the conversation.

*Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values.

Licensed Insurance Professional. This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, no representation is made as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice, or specific advice for your situation. This information has been provided by a Licensed Insurance Professional and is not sponsored or endorsed by the Social Security Administration or any government agency.

18686 – 2019/3/25

Do NCAA Tournament Winners Predict Market Returns?

If you’re a college basketball fan, this is your favorite time of year. March Madness is in full swing. That means a full schedule of games every weekend, buzzer-beating finishes and unbelievable upsets. If you’re like many fans, your bracket is already a mess.

It’s nearly impossible to predict the outcome of the NCAA Tournament. According to a Duke University professor, the odds of predicting a perfect bracket are 1 in 2.4 trillion.1 Even getting the Final Four correct can be difficult: In last year’s Capital One Bracket Challenge, only 54 entries had the Final Four teams correct.2

It may also feel like it’s impossible to predict the movement of the financial markets. The major indexes can swing in any direction on any given day, influenced by an infinite number of events and updates from around the world. In the short term, it’s virtually impossible to predict where the markets are headed.

But can you use the winner of the NCAA Tournament to make a market prediction? Researchers from Schaeffer’s Investment Research recently studied S&P 500 index returns from April to December along with past NCAA Tournament champions to see if there’s any correlation between the two.

The research found that the market has consistently had positive annual returns when the NCAA Tournament champion has come from the Southeastern Conference (SEC). That’s happened 11 times. The S&P 500 has gone on to have a positive return the rest of the year in each of those instances. The median return from April to December when the champion is an SEC team is 9.56 percent.3

The market has also had positive returns at least 75 percent of the time when the champion has come from the ACC, Pac-12 or Big East. The ACC and Pac-12 have produced the most champions, with each conference winning 16 times. During years in which the ACC has won, the market had a positive return 75 percent of the time, with a median return of 9.59 percent. When the Pac-12 wins, the market has been positive 88 percent of the time, with a median return of 8.91 percent.3

When does the S&P 500 have a negative return from April to December? When the NCAA Tournament winner comes from the Big Ten Conference. In those years, the market has been positive only 36 percent of the time, with a median return of -4.76 percent.3

Coincidence Isn’t the Same Thing as Correlation

Of course, just because these patterns exist doesn’t mean there’s an actual correlation between the tournament winner and the returns of the market. There’s no factor tying the championship outcome to the S&P 500, so these patterns are entirely coincidental. They shouldn’t be used to try to make any kind of market predictions.

If you want to stabilize your investment performance and reduce volatility, there are other steps you can take besides relying on the outcome of a basketball tournament. Below are a few steps to consider:

Review your allocation. As you get older and approach retirement, it’s natural to become less tolerant of risk. You may not be able to stomach the ups and downs of the market like you used to. That’s understandable. After all, you’ll need to rely on those savings for income in the near future.

Now could be a good time to review your allocation with your financial professional. It’s possible that your current allocation isn’t right for your goals, needs and risk tolerance.

Rebalance. The market moves up and down, but not all asset classes move in the same direction at the same time. As some asset classes increase in value, others decline. That means your actual allocation is always in a state of flux. Over time, it may become far different than your desired allocation.

It’s helpful to regularly rebalance your portfolio so it always adjusts back to your target allocation. When you rebalance, you sell some of the assets that have increased in value and buy those that have declined. That can help you lock in gains and stay aligned with your desired strategy.

Use an annuity. An annuity can be an effective tool to potentially increase your assets but also limit downside risk. For example, a fixed indexed annuity pays an interest rate based on the performance of an index, like the S&P 500. The better the index performs over a defined period, the higher your rate. If it performs poorly, you may get little or no interest. However…

In a fixed indexed annuity, your principal is guaranteed*. There’s no risk of loss due to market performance. That means you get upside potential without the volatility.

Want to take steps to make your portfolio less volatile? Don’t look toward coincidental trends. Instead, implement a thoughtful strategy. Contact us today at Sage Financial Partners. We can help you review your portfolio and find areas for improvement. Let’s connect soon and start the conversation.

1https://ftw.usatoday.com/2015/03/duke-math-professor-says-odds-of-a-perfect-bracket-are-one-in-2-4-trillion

2https://www.ncaa.com/news/basketball-men/bracketiq/2018-03-26/54-ncaa-brackets-correctly-predicted-final-four

3https://www.schaeffersresearch.com/content/analysis/2017/03/23/march-madness-indicator-why-the-stock-market-should-root-for-kentucky

*Guarantees, including optional benefits, are backed by the claims-paying ability of the issuer, and may contain limitations, including surrender charges, which may affect policy values.

Licensed Insurance Professional. This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, no representation is made as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice, or specific advice for your situation. This information has been provided by a Licensed Insurance Professional and is not sponsored or endorsed by the Social Security Administration or any government agency.

18583 – 2019/2/27

4 Tax Tips to Consider for 2019

The deadline for filing your 2018 tax return is right around the corner. Have you filed your return yet? If so, were you satisfied with the outcome? Or were you surprised by how much you paid in taxes last year?

The recent tax law dramatically changed the tax code. For many Americans, the law means reduced taxes. If you don’t plan properly, however, it’s possible that you could owe money to the IRS after your filing. It’s also possible that you could pay more in taxes than necessary.

Now is a great time to review your strategy and identify action steps that could reduce your tax exposure. If you haven’t reviewed your financial plan recently, you may be missing out on a number of tax-efficient tools and strategies. Below are a few tips to consider as you prepare your taxes:

Review your deductions.

One of the biggest changes of the Tax Cuts and Jobs Act is the elimination and reduction of a wide range of deductions. Most itemized deductions were eliminated, including those for alimony payments and interest on many types of home equity loans. Caps were also implemented for state, local and property tax deductions. The law also eliminated personal exemptions.1

To make up for these changes, the law more than doubled the standard deduction.1 For many people, that means it will be more advantageous to take the standard deduction than to itemize deductions. If you’ve planned your spending based on the ability to itemize and deduct certain expenses, you may want to reconsider your strategy. Those deductions may no longer be allowed under the new law.

Check your withholding amount.

The law also reduced tax rates across the board and changed the income brackets for each rate level. As a result, many employers adjusted their withholding amounts. Not all did, however. And some may have adjusted their withholdings incorrectly.

In fact, according to a study from the Government Accountability Office, 30 million people, or just over 20 percent of taxpayers, are not withholding enough money from their paychecks to cover taxes.2 Are you part of that group? If you’re not sure, talk to your tax professional about whether you should increase your withholdings.

Maximize your tax-deferred savings.

Tax deferral is a great way to reduce current taxes and save for the future. In a tax-deferred account, you don’t pay taxes on growth in the current year as long as your money stays in the account. You may face taxes in the future when you take a distribution.

Many qualified retirement accounts, such as 401(k) plans and IRAs, offer tax-deferred growth. In 2019 you can contribute up to $19,000 to your 401(k), plus an additional $6,000 if you are age 50 or older. You can put as much as $6,000 into an IRA, or up to $7,000 if you’re 50 or older.3

Want more tax deferral beyond your 401(k) and IRA? Consider a deferred annuity. Annuities offer tax-deferred growth. They also offer a variety of ways to increase your assets. Some pay a fixed interest rate and have no downside risk. Others let you participate in the financial markets according to your risk tolerance and goals. A financial professional can help you find the right annuity for your strategy.

Develop sources of tax-efficient retirement income.

Taxes don’t stop when you quit working. If you’re approaching retirement, now may be the time to plan ahead and minimize your future tax exposure. You can take steps today to create tax-efficient income for your retirement.

For example, distributions from a Roth IRA are tax-free assuming you’re over age 59½. You may want to start contributing to a Roth or even consider converting your traditional IRA into a Roth.

You can also use a permanent life insurance policy as a source of tax-efficient income. You can withdraw your premiums from your life insurance cash value tax-free. Also, loans from life insurance policies are tax-free distributions. You may want to discuss with your financial professional how life insurance could reduce your future taxes in retirement.

Ready to take control of your tax strategy in 2019? Let’s talk about it. Contact us today at Sage Financial Partners. We can help you analyze your needs and implement a plan. Let’s connect soon and start the conversation.

1https://www.thebalance.com/trump-s-tax-plan-how-it-affects-you-4113968

2https://www.cnbc.com/2018/08/01/30-million-americans-are-not-withholding-enough-pay-for-taxes.html

3https://www.cnbc.com/2018/11/01/heres-how-much-you-can-sock-away-toward-retirement-in-2019.html

Licensed Insurance Professional. This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, no representation is made as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice, or specific advice for your situation. This information has been provided by a Licensed Insurance Professional and is not sponsored or endorsed by the Social Security Administration or any government agency.

18582 – 2019/2/27