the advisor's guide to retirement planning

517 Pages·2017·3.5 MB·English

by  Best 14

THE ADVISOR’S GUIDE
TO RETIREMENT PLANNING
(2017 Edition)

Researched and Written by:
Edward J. Barrett
CFP, ChFC, CLU, CEBS, RPA, CRPS, CRPC

© 2017 EJB Financial Press LLC, Printed in U.S.A. All rights reserved
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DISCLAIMER

This book is designed as an educational program for insurance and financial
professionals. EJB Financial Press is not engaged in rendering legal or other
professional advice and the reader should consult legal counsel as
appropriate.

We have tried to provide you with the most accurate and useful information
possible. However, one thing is certain and that is change. The content of
this publication may be affected by changes in law and in industry practice,
and as a result, information contained in this publication may become
outdated. This material should in no way be used as an original source of
authority on legal and/or tax matters.

Any laws and regulations cited in this publication have been edited and
summarized for the sake of clarity.

Any names used in this publication are fictional and have no relationship to
any person living or dead.

EJB Financial Press, Inc.
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New Port Richey, FL 34653
[phone]
www.EJBfinpress.com

This book is manufactured in the United States of America

© 2017 EJB Financial Press Inc., Printed in U.S.A. All rights reserved

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ABOUT THE AUTHOR

Edward J. Barrett CFP, ChFC, CLU, CEBS, RPA, CRPS, CRPC, began his career
in the financial and insurance industry back in 1977 with IDS Financial Services, as a
financial advisor and then becoming one of the company’s top district sales manager in
Boston, Massachusetts. In 1986, Mr. Barrett was recruited to join Merrill Lynch and
became the Estate and Business Insurance Planning Specialist working with over 400
Financial Advisors and their clients throughout the New England region.

In 1992, after leaving Merrill Lynch and moving to Florida, Mr. Barrett founded The
Barrett Companies Inc. and Wealth Preservation Planning Associates, a financial and
insurance brokerage agency. During the same period, Mr. Barrett also formed Broker
Educational Sales & Training Inc., a premier provider of training and continuing
education programs to financial and insurance professionals in all 50 states and the
District of Columbia.

Mr. Barrett is a highly sought after speaker for financial advisors, insurance
professionals, attorneys, CPA’s and general audiences. He has written over 1,000
financial articles for newspapers and magazines and has authored several books.

Mr. Barrett has been a qualifying member of the Million Dollar Round Table, Qualifying
Member Court of the Table® and Top of the Table® producer. He has a number of
professional designations including: Certified Financial Planner (CFP), Chartered
Financial Consultant (ChFC), Chartered Life Underwriter (CLU), Certified Employee
Benefit Specialist (CEBS), Retirement Planning Associate (RPA), Chartered Retirement
Planning Consultant (CRPC), and Chartered Retirement Planning Specialist (CRPS).

About EJB Financial Press

EJB Financial Press, Inc. (www.ejbfinpress.com) was founded in 2004, by Mr. Barrett to
provide advanced educational and training manuals approved for correspondence
continuing education credits for insurance agents, financial advisors, accountants and
attorneys throughout the country.

Broker Educational Sales & Training Inc.

Broker Educational Sales & Training Inc. (BEST) is a nationally approved provider of
continuing education and advanced training programs to the mutual fund, insurance,
financial services industry and an approved sponsor of CPE courses with the National
Association of State Boards of Accountancy and Quality Assurance Service (QAS).

For more information our website selfstudyce.brokered.net or call us at 800-345-5669.
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PREFACE

Most observers agree that retirement planning has arrived. The demographics are there
(10,000 boomers a day are turning age 65). According to the U.S. Census Bureau, the
proportion of the U.S. population over the age of 65 is expected to grow from 14.8% in
2015 to 20.3% in 2030. And recent studies report that consumer demand is high (84
percent of annuity producers report having client discussions about retirement planning).
And advisor interest is mounting (77 percent of advisors are planning to add such
planning to their offering). This presents an enormous opportunity for financial
advisors—and potentially, big challenges as well.

In fact, in 2000, the U.S. Census counted about 82 million individuals in the boomer
demographic (those born between 1946 and 1964); a 2006 research study put the number
at 77 million. The numbers speak for themselves. Just over half of the 77 million baby
boomers will retire in the next 10 years. The largest generation to retire en-masse in
history. According to a recent report by The Life Insurance Marketing Research
Association (LIMRA), investable retirement assets of U.S. households aged55+ will
nearly double to $22 trillion by 2020.

Clearly, those figures add up to tell us that financial guidance will be an imperative
component of this generation’s success in shifting from wealth accumulators to wealth
distribution. By assisting retirees with education and guidance, advisors can help make
the daunting responsibility of planning for retirement more manageable. After all, there’s
no one-size-fits-all approach to retirement planning. Every retiree’s situation is different.
And evaluating which strategy is right for each individual can be complex and time-
consuming.

As the advisor it will be your fiduciary responsibility to offer solutions to help improve
the odds that your clients will receive adequate income during retirement, no matter how
long that retirement may be or the extent of the resources available to fund it. Fortunately
for advisors, a multitude of options now exists for providing clients with such guidance.
Advisors who ask the right questions and recommend the most appropriate strategies are
likely to gain new business and improve their existing client relationships. With the
consequences of failure so high, it is imperative that advisors fully understand the
complexities of distribution planning so they may provide sound guidance to their clients.

To prepare advisors for this opportunity, this text has been developed to provide guidance
about the many facets of prudent retirement planning and the tools available to help you,
the advisor, to respond to a need that so many of your Baby Boomer clients, Generation
X and the Millennials have: help in planning for their retirement that may last longer than
their working years.
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TABLE OF CONTENTS

ABOUT THE AUTHOR .................................................................................................. 3
PREFACE .......................................................................................................................... 5
CHAPTER 1 DEFINING RETIREMENT PLANNING ........................................ 23
Overview ........................................................................................................................... 23
Learning Objectives .......................................................................................................... 23
The Need for Retirement Planning ................................................................................... 24
The Changing Trends in Retirement Planning.................................................................. 24
Critical Issues That Affect Retirement Planning .............................................................. 26
Critical Issue One: Retirement Age ......................................................................... 26
Critical Issue Two: Length of Retirement ................................................................ 27
Critical Issue Three: Financial Preparedness ........................................................... 28
The Five-Step Process of Retirement Planning ................................................................ 30
Step 1: The Discovery Process ................................................................................ 30
Step 2: Gathering Data and Developing a Retirement Income Plan ........................ 31
Step 3: Analyze the Data .......................................................................................... 31
Step 4: Implementing the Retirement Plan .............................................................. 32
Step 5: Monitoring the Retirement Plan .................................................................. 33
Chapter 1 Review Questions ............................................................................................ 35
CHAPTER 2 DETERMINING INCOME NEEDS IN RETIREMENT ............... 37
Overview ........................................................................................................................... 37
Learning Objectives .......................................................................................................... 37
Assessing the Need for Retirement Income ...................................................................... 37
Income Replacement Ratio ............................................................................................... 38
Actual Expense Method .................................................................................................... 39
Age Banding Method ........................................................................................................ 42
Defining the Age-Banded Model .............................................................................. 42
Application of Age-Banded Model ........................................................................... 44
Investing the Portfolio............................................................................................... 48
Risk Considerations .................................................................................................. 49
Chapter 2 Review Questions ............................................................................................ 52
CHAPTER 3 RETIREMENT INCOME RISK FACTORS ................................... 53
Overview ........................................................................................................................... 53
Learning Objectives .......................................................................................................... 53
Risk Factors ...................................................................................................................... 53
Longevity Risk .................................................................................................................. 54
Longevity Risk Defined ............................................................................................ 54
Inflation Risk .................................................................................................................... 56
Rule of 72 and 115 .................................................................................................... 56
How to Measure Inflation ......................................................................................... 58
CPI-U ........................................................................................................................ 59
CPI-W ....................................................................................................................... 61
CPI-E......................................................................................................................... 62
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C-CPI-U .................................................................................................................... 62
Market Risk ....................................................................................................................... 64
Sequence of Returns Risk ......................................................................................... 65
Spending (Withdrawal) Risk............................................................................................. 67
Withdrawal Rate ....................................................................................................... 67
Safe (Sustainable) Withdrawal Rate ......................................................................... 67
Health Care Risk ............................................................................................................... 68
Tax Rate Risk .................................................................................................................... 68
Phases in Tax Management ...................................................................................... 69
Declining Cognitive Abilities ........................................................................................... 73
Chapter 3 Review Questions ............................................................................................ 75
CHAPTER 4 STRATEGIES FOR MANAGING RETIREMENT INCOME ...... 77
Overview ........................................................................................................................... 77
Learning Objectives .......................................................................................................... 77
Background ....................................................................................................................... 77
Types of Retirement Income Strategies ............................................................................ 78
Systematic Withdrawal Plan ............................................................................................. 79
The SWP Strategy ..................................................................................................... 80
Other Variations ........................................................................................................ 81
Time-Based Segmented (Bucket) Strategy ....................................................................... 82
The Three Bucket Strategy ....................................................................................... 84
Maintenance of the Bucket Strategy ......................................................................... 85
The Mechanical Approach ........................................................................................ 86
The Income-Only Approach ..................................................................................... 86
The 'Strict Constructionist' Total-Return Approach ................................................. 87
The Opportunistic Approach..................................................................................... 87
The Floor and Upside Strategy ......................................................................................... 88
Assets ........................................................................................................................ 88
Liabilities .................................................................................................................. 88
Human Capital .......................................................................................................... 88
Fixed Expenses ......................................................................................................... 88
Continuing Career ..................................................................................................... 88
Basic Living Needs ................................................................................................... 88
Part-time work .......................................................................................................... 88
Taxes ......................................................................................................................... 88
Home Equity ............................................................................................................. 88
Debt Repayment........................................................................................................ 88
Financial Assets ........................................................................................................ 88
Discretionary Expenses ............................................................................................. 88
Checking Accounts ................................................................................................... 88
Travel & Leisure ....................................................................................................... 88
Brokerage Accounts .................................................................................................. 88
Lifestyle Improvements ............................................................................................ 88
Retirement Plans ....................................................................................................... 88
Contingencies ............................................................................................................ 88
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Insurance & Annuities .............................................................................................. 88
Long-Term Care........................................................................................................ 88
Social Capital ............................................................................................................ 88
Health Care ............................................................................................................... 88
Social Security .......................................................................................................... 88
Other Spending Shocks ............................................................................................. 88
Medicare ................................................................................................................... 88
Legacy Goals ............................................................................................................ 88
Company Pensions .................................................................................................... 88
Family ....................................................................................................................... 88
Family & Community ............................................................................................... 88
Community & Society .............................................................................................. 88
The Mechanics of the Floor and Upside Strategy ..................................................... 89
Two Views of Flooring ............................................................................................. 91
Flooring and the FPA’s Three Categories ........................................................................ 93
Choosing a Strategic Plan ................................................................................................. 93
Chapter 4 Review Questions ............................................................................................ 94
CHAPTER 5 THE SUSTAINABLE (“SAFE”) WITHDRAWAL RATE ............. 95
Overview ........................................................................................................................... 95
Learning Objectives .......................................................................................................... 95
Background ....................................................................................................................... 95
SWR Defined .................................................................................................................... 97
SWR Research .................................................................................................................. 97
The Harvard Study .................................................................................................... 98
The 7 Percent Fiasco ................................................................................................. 99
The Bengen Study ..................................................................................................... 99
The Trinity Study .................................................................................................... 100
New Generation of SWR Studies ................................................................................... 102
The 4% Rule—At What Price ................................................................................. 102
The 4% Rule Is Not Safe in a Low-Yield World .................................................... 103
The Dynamic Withdrawal Strategy ........................................................................ 104
Advisor’s Role in Developing a SWR ............................................................................ 107
Setting Expectations................................................................................................ 107
The Withdrawal Policy Statement .................................................................................. 108
Key Provisions of A WPS....................................................................................... 108
Implementing a WPS .............................................................................................. 109
Sample WPS from Jon Guyton ............................................................................... 109
Chapter 5 Review Questions .......................................................................................... 111
CHAPTER 6 SOURCES OF RETIREMENT INCOME ..................................... 113
Overview ......................................................................................................................... 113
Learning Objectives ........................................................................................................ 113
Basic Sources of Retirement Income .............................................................................. 113
The New “Fourth Leg” of the Stool ................................................................................ 120
Support for a Fourth Retirement Savings “Pillar” .................................................. 120
Working Longer ...................................................................................................... 121
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Insurance Products .......................................................................................................... 124
Role of Life Insurance in Retirement Income ......................................................... 124
Role of Annuities in Retirement Income ................................................................ 125
Chapter 6 Review Questions .......................................................................................... 126
CHAPTER 7 SOCIAL SECURITY ........................................................................ 127
Overview ......................................................................................................................... 127
Learning Objectives ........................................................................................................ 127
OASDI Background ........................................................................................................ 128
Types of OASDI Benefits ....................................................................................... 128
Relative Importance of OASDI .............................................................................. 129
Old-Age (OA) Retirement Benefits ................................................................................ 130
Survivor (S) Benefits .............................................................................................. 132
Disability Insurance (DI) Benefits .......................................................................... 132
2017 Projected OASDI Average Benefit Payments ....................................................... 133
Qualifying for OASDI Benefits ...................................................................................... 134
Insured Status .................................................................................................................. 134
Quarters of Coverage .............................................................................................. 135
Quarters for Self-Employed Individuals ................................................................. 135
Types of Insured Status ................................................................................................... 135
Fully Insured Status ................................................................................................ 136
Currently Insured Status ......................................................................................... 136
Disability Insured Status ......................................................................................... 136
How To Calculate Old-Age Retirement Benefits ........................................................... 137
Average Indexed Monthly Earnings ....................................................................... 137
Primary Insurance Amount ..................................................................................... 138
Full (Normal) Retirement Age ................................................................................ 139
Adjustments to the PIA ........................................................................................... 140
Electing Early Retirement Benefits ........................................................................ 140
Loss of Benefits Because the Retirement Earnings Test ........................................ 142
The Windfall Elimination Provision ............................................................................... 144
Government Pension Offset ............................................................................................ 146
Delaying the Election of Retirement Benefits ................................................................ 147
Cost-of-Living Adjustments ........................................................................................... 149
Social Security Wage Statements ................................................................................... 150
Taxation of Social Security Benefits .............................................................................. 150
Calculation of Taxable Social Security Benefits .................................................... 150
State Taxation of Social Security Benefits ..................................................................... 152
Reducing Taxation on Social Security Benefits ............................................................. 152
Chapter 7 Review Questions .......................................................................................... 154
CHAPTER 8 STRATEGIES TO MAXIMIZE SOCIAL SECURITY BENEFITS
......................................................................................................................................... 155
Overview ......................................................................................................................... 155
Learning Objectives ........................................................................................................ 155
Applying for OA Retirement Benefits ............................................................................ 155
Immediate Financial Need ...................................................................................... 156
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