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06/29/2023

According to Bank of America's 2023 Financial Life Benefits Impact Report, men have saved 50% more in their 401(k) plans than women. The average 401(k) balance for men at the end of 2022 was $89,000, while women had an average balance of $59,000. However, the gender savings gap is narrowing among younger generations. Baby Boomer and Generation X men have significantly higher account balances than women in their generations, but the gap between millennial men and women has decreased to 23%.

Bank of America emphasized the importance of addressing the gender savings gap, stating that it carries personal implications for many individuals and macroeconomic implications for society as a whole. They encouraged female employees to contribute as much as possible to their 401(k) plans and take advantage of employer-match programs. Work disruptions, often related to caregiving responsibilities, can affect women's earnings and savings over their lifetime.

The report also highlighted that Generation X has the highest 401(k) participation rate (65%), followed by Baby Boomers (57%) and Millennials (55%). However, both participation and contribution rates dropped slightly at the end of 2022. Bank of America recommended the use of auto-enrollment and auto-increase features in 401(k) plans, which have been found to be effective tools in increasing employee contributions. Plans with auto-enrollment saw higher participation rates, and including auto-increase features led to more participants increasing their contribution rate.

Bank of America emphasized the need for financial education and support to address women's lower confidence in managing longer-term financial planning tasks. They suggested adding auto-enrollment and auto-increase to plan designs, coupled with financial education programs, to promote engagement and build understanding and confidence.

The study found that only 16% of accounts use advisory services, with women lagging behind men in their use of advisor and planning services. Participants expressed a strong interest in financial education resources, particularly on retirement and budgeting topics. Webinars, short videos, and website visits were the preferred methods for learning.

Overall, the average 401(k) account balances declined by 17% in 2022 due to market declines, and the average balances fall short of what retirees will need. For Baby Boomers, men have an average account balance of $179,688, while women have $95,939. Gen X men have an average balance of $123,177, compared to women's average balance of $80,473. Among millennials, men have an average balance of $29,218, while women have $23,715.

Equity mutual funds hold the highest account allocation at 36%, and Millennials have the highest percentage of their account balances in target date funds. Women were found to hold slightly more target date funds in their 401(k)s compared to men.

In summary, the report highlights the gender savings gap in 401(k) plans, the importance of promoting financial education and engagement, and the potential benefits of auto-enrollment and auto-increase features in narrowing the savings gap and improving retirement preparedness.

06/28/2023

Wealthy individuals who do not have an immediate need for money in retirement often choose to delay taking Social Security until age 70 or beyond. There are various tax implications associated with this decision. While Social Security benefits make up a smaller portion of wealthy individuals' overall retirement income, they can temporarily replace this income with other savings. Wealthy individuals can afford to wait for the maximum benefit, and many believe that waiting until age 70 is the best strategy.

By deferring Social Security benefits beyond the full retirement age (FRA), individuals can receive an 8% increase in their benefit amount each year until age 70. If they were born after 1960 and choose to defer until 70, they would receive 124% of their original benefit compared to starting at age 67. It's important to note that benefits do not increase after age 70.

Delaying Social Security benefits can have tax advantages for wealthy individuals. They will pay income tax on 85% of their benefit payments. Delaying benefits allows them to increase their lifetime income while postponing the payment of income taxes. Additionally, their benefits include cost-of-living increases even during deferral, providing an inflation-adjusted income that is not exhaustible. Eventually, they will pay income taxes, but possibly at a lower tax bracket.

The impact on a spouse is another factor to consider. If a spouse has a lower income-earning history, they can step into the deceased spouse's benefit at death, resulting in a significant benefit for the surviving spouse.

Some wealthy individuals may consider filing early and investing the benefits, but research suggests that it is uncommon for investment returns to surpass the implied benefit of delaying Social Security, even for long-lived retirees with aggressive asset allocation.

It is crucial for you to weigh the potential trade-off between taking smaller benefits earlier versus larger benefits you may not live long enough to claim. You generally need to live 12 to 14 years past age 70 to reap the rewards of taking the maximum benefit. If you do not live past the age of 82, the decision to delay may result in a loss of money.

Individuals who have delayed Social Security can use IRA withdrawals to reduce the value of their IRA by the time they reach the age of required minimum distributions. It is worth noting that some states tax Social Security, while delaying benefits may reduce the chance for assets to grow further for day-to-day living expenses.

You should also consider your health and family medical history when deciding when to take benefits. If your family has a low life expectancy, it may be advisable to take the benefit earlier. It's important not to treat Social Security as an afterthought for wealthy individuals, as it can be a significant financial decision, potentially amounting to millions of dollars for couples who live long lives.

06/27/2023

According to a survey by Northwestern Mutual, Americans say they will need $1.27 million to live comfortably in retirement, slightly more than the $1.25 million they estimated last year. However, respondents admit that they are nowhere near saving that much. Those in their 50s had saved only $110,900, while those in their 60s had saved $112,500. On average, respondents across all age groups believe there is a 45% chance they will outlive their savings.

The survey also revealed that respondents plan to work until age 65 on average, up from 64 last year. However, respondents who consider themselves "undisciplined" in their retirement savings said they would need to work until age 67. Only 45% of Gen X respondents believe they will be financially prepared for retirement, while 54% of Millennials and 65% of Gen Z expressed confidence in their financial readiness. Among Boomers, only 52% believed they would be financially ready.

The survey highlighted that 33% of respondents have not taken any steps to address a retirement income shortfall, which can be a cause for concern. The two biggest fears among respondents were declining health in retirement (44%) and outliving their savings (43%). Interestingly, 28% of Americans now believe it is likely they will live to 100.

When it comes to funding retirement, respondents mentioned that 401(k)s, other retirement accounts, and Social Security combined would account for 56% of the income needed in retirement (each source contributing 28%). Personal savings and investments were expected to contribute 22%, while support from a spouse/partner (8%), inheritance (6%), support from children (3%), and "other" (6%) made up the remaining sources of income.

Financial advisors emphasized the importance of addressing the potential income shortfall and recommended strategies such as saving more, working longer, and considering annuities to ensure a secure retirement. The survey provides insights into Americans' retirement concerns and highlights the need for increased financial planning and savings to bridge the gap between retirement expectations and current savings levels.

06/26/2023

As you approach your 65th birthday, it can be overwhelming to navigate the flood of information and misinformation about Medicare. Flyers from marketers may arrive in your mailbox, but they might not provide the full picture. Consulting your company's HR department or talking to friends who are also turning 65 might not give you the specific information you need for your situation. Amidst all the competing sources of information, it's important to cut through the noise and find the right Medicare plan for you.

When considering enrollment in Medicare, it's crucial to understand the different parts of Medicare. Medicare Part A covers hospitalization and inpatient medical services at no cost to you if you have worked for at least 40 quarters or 10 years over your lifetime. Medicare Part B covers doctor visits and outpatient medical services. The base monthly premium for Medicare Part B in 2023 is $164.90, but higher-income individuals may be subject to an income-related monthly adjustment amount (IRMAA), which can increase the premium. The Medicare board determines the base premium for the following year in October, and it can fluctuate.

If you choose not to enroll in Part B and still have a group plan through your employer, you can opt for enrolling only in Part A until you fully retire, and there will be no monthly premium for Part A for most beneficiaries.

It's important to conduct a cost-benefit analysis of your current plan. Understanding the benefits of your employer-sponsored group plan is essential. Take note of the plan's network type (PPO, POS, or EPO), deductible, out-of-pocket maximum, paycheck deductions, and co-pays. Original Medicare benefits don't have networks, co-pays, maximum out-of-pockets, pre-approvals, or prior authorizations. Generally, Medicare offers better benefits than most group plans, but it's crucial to assess the financial feasibility of paying the monthly premium for Medicare Part B. Compare your group plan's deductible with Medicare when making your decision.

Consider the size of your company as well. If your company has over 20 employees, Medicare will be secondary to your group plan, meaning your private insurance will pay first, and Medicare will pay second. If you're still working and have group coverage through your employer, it might make sense to stay on your employer's plan. However, if your company has fewer than 20 employees, enrolling in Medicare as soon as you turn 65 is generally advisable because Medicare will be the primary payer, and your group plan, if you choose to keep it, will be secondary. If your group plan is secondary, you might need to enroll in Medicare Part B before the group plan pays.

It's important to note that by law, employers cannot incentivize you to leave a group plan. The decision to leave or keep the group plan is entirely up to you.

You can enroll in Medicare three months before your 65th birthday, and it will become effective on the first day of your birthday month. For example, if your birthday is on June 15, your Medicare coverage would start on June 1.

Late enrollment penalties can apply if you delay getting Medicare Part B coverage. However, if you maintain your group insurance coverage offered by your employer, known as "creditable coverage," you can waive these penalties. You will need to provide proof to the Social Security Administration that you are enrolled in a group plan with more than 20 employees. It's important not to keep your group coverage as primary and then sign up for Medicare Part B as secondary to avoid late enrollment fees. This common mistake can result in paying a Part B premium for benefits you won't need.

Remember that Medicare is your right at age 65, even if you're still working. How you choose to utilize this benefit depends on your individual circumstances. Consult with a financial professional for guidance in making the right decision.

06/23/2023

New research shows that stalled house prices and the rising cost of living are pushing some older workers back into the labor force, challenging the notion of a "Great Retirement." The pandemic era witnessed a decline in the US labor force due to early retirements, reduced immigration, and the impacts of long Covid. Economists estimate that around 3 million older Americans retired earlier than expected, referred to as "excess retirements." While some retirees left work due to fear of contracting Covid-19, others were influenced by soaring housing and stock prices. However, recent data indicates a decrease of approximately 600,000, or 20%, in the number of excess retirees since the end of last year.

Several factors contribute to this decline. Some older Americans may have been attracted back to work by a strong labor market and rising wages, although the rate of increase has cooled slightly. Concerns about declining housing values, higher interest rates, and inflation may have also played a role. Additionally, the slowdown in immigration during the pandemic magnified the proportion of retirees in the overall population, contributing to the dip in retirements.

Despite some retirees reentering the workforce, the majority remain on the sidelines, creating a need for workers in the economy. In April, the number of available positions in the US reached a historically high figure of 10.1 million. The Federal Reserve's Board of Governors noted in its June report on monetary policy that the employment-to-population ratio for Americans aged 55 and over still lags behind pre-pandemic levels, primarily due to increased retirements since the start of the pandemic.

06/19/2023

Author and insurance veteran Tom Hegna spoke at the Inside Retirement conference about the concept of "retirement alpha" and how it can enhance retirement portfolios. Hegna emphasized that retirement alpha refers to the extra value gained from a retirement portfolio and can be achieved by incorporating income annuities. He explained that income annuities, such as single premium immediate annuities (SPIAs) or deferred income annuities (DIAs), are essential for guaranteeing a secure retirement and building an efficient retirement portfolio.

Hegna outlined the various benefits of income annuities. First, they provide uncorrelated cash flow that is not influenced by market performance or interest rate fluctuations, serving as a hedge against volatility. Second, they offer longevity insurance, ensuring a lifetime income stream regardless of advances in medical science or increased life expectancy. Third, they offer a degree of liquidity. However, the most significant advantage lies in mortality credits, which are unique to life insurance companies.

Mortality credits are the additional funds received from being part of a risk pool, primarily contributed by annuity holders who pass away earlier than expected. These credits allow income annuities to provide payout rates that exceed those of bonds, making them a valuable component of a retirement portfolio. Hegna emphasized that annuity payouts are not interest rates but rather separate, contractually guaranteed amounts. He described mortality credits as the "secret sauce" behind the continuous income flow from annuities even after the principal is depleted.

Hegna also clarified that annuities with guaranteed lifetime income benefits, including indexed annuities and variable annuities, offer mortality credits. He acknowledged that annuities often face criticism due to perceived high costs and comparisons to stock investments. However, he emphasized that income annuities should not be seen as stock substitutes but rather as bond substitutes.

Another advantage of income annuities highlighted by Hegna is the ability to enjoy retirement without financial constraints. Retirees often hold onto their assets or overspend due to fear or lack of control. However, with income annuities covering living expenses, retirees can manage their portfolios more effectively and confidently spend on activities that bring them joy.

Hegna concluded by citing research indicating that retirees with guaranteed lifetime income, provided by income annuities, tend to be happier. Having a reliable income source allows retirees to avoid excessive withdrawals from their portfolios and plan their expenses accordingly.

When comparing income annuities to bond ladders, Hegna noted that annuities consistently offer higher payout rates, making them a preferable option. He emphasized that no other investment vehicle can guarantee a higher payout per dollar invested than an income annuity. Finally, Hegna reminded the audience that if they appreciate Social Security or pensions, they should also consider the benefits of annuities.

06/15/2023

Some people believe that politicians in Washington, D.C. have a hidden agenda to solve the federal debt problem by inflating their way out of it. However, Loomis Sayles Vice Chairman Dan Fuss argues that this strategy won't work. He points to the example of Turkey, where the decline in the value of their currency, the lira, has led to a collapse in living standards.

Fuss also suggests that the recent inflation numbers in the U.S. are a cause for concern, as many cost increases are structurally locked into the economy. He compares the current inflation to that of the late 1960s and mid-1970s.

Fuss predicts that the Federal Reserve will face pressures from politicians in the next 18 months but doesn't expect them to back away from their current approach. He advises bond investors to focus on the short end of the yield curve and avoid long-term bonds.

Fuss believes that the economy is in the early stages of a new business cycle, which will bring both opportunities and changes in corporate behavior.

05/22/2023

According to the Center for Retirement Research at Boston College, almost half of U.S. households will not have enough retirement income to maintain their living standards, even if they work until the age of 65 and annuitize all their assets.

The latest update of the National Retirement Risk Index (NRRI) reveals that 47% of households are at risk of being unable to support their standard of living in retirement, based on 2019 data.

When examining wealth groups, 73% of low-wealth households are projected to face income insufficiency, compared to 28% of high-wealth households.

The study's methodology was modified, incorporating enhanced retirement income projections and data that more accurately reflects the shift from defined benefit to defined contribution retirement plans.

However, the overall findings align with previous results, emphasizing that Americans' retirement affordability is heavily influenced by the state of the economy.

The report highlights that approximately half of working-age households will struggle to maintain their pre-retirement living standards, and this trend remains linked to economic conditions.

The NRRI exhibited a significant increase in at-risk families from 2007 to 2010 during the Great Recession, followed by a decline from 2013 to 2019, attributed to low unemployment, rising wages, robust stock market growth, and increasing housing prices.

Nevertheless, the improvements leading up to 2019 were modest due to factors such as the gradual rise in Social Security's Full Retirement Age (FRA) and declining interest rates, which hindered retirement readiness.

The study also identified disparities in retirement income based on age, income level, and wealth.

For instance, although 47% of all age groups were at risk of not maintaining their living standards in retirement, 49% of individuals aged 30 to 39 faced this risk upon reaching 65, compared to 46% in the 40-49 and 50-59 age groups.

In terms of income, 56% of individuals with low income were at risk, compared to 45% with mid-level income and 41% with high income.

The report indicates that the middle and highest income groups experienced notable improvements from 2010 to 2019, driven by housing and equity price rebounds, while households in the lowest income group saw minimal progress due to lower homeownership rates, limited participation in defined contribution plans, and fewer financial assets.

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