Please don’t think that we are anti-pension. We love pensions and the **guarantees they offer; however, lately we have been talking with people who were counting on pension benefits to be there when they [continued below video…]

 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. During this segment, Dick and Eric are referring to Fixed Annuities unless otherwise specified.

[continued]…retired – yet are now fearful that due to “unfunded pension liabilities”, they may not receive the benefits they worked so long to achieve and now feel forced to take an unfair lump sum buyout.

Pensions are **guaranteed nationally by the Pension Benefit Guaranty Corporation (PGBC) and they help advise employees impacted by lost or failing plans. It should be noted that most pensioners receive their full benefits even when they are administered by the PGBC. So, why the concern? The PGBC is currently running over a 60 billion dollar deficit due to the number of recent bankruptcies. Congress is expected to try and close the gap by increasing the premiums due to the PGBC, which are charged on a per participant basis; however, many suspect that increases in those premiums will just continue to increase the number of companies dropping pension plans and programs altogether.

So, what happens when a solvent company wants to drop their pension program? The company typically has two options; they can offload the liabilities of the pensions to an insurance carrier to fulfill the obligation or they can offer a lump sum payment that covers pensioner’s benefit.

Just because you are offered a buyout does not mean you should jump at the option solely because of the risk of the entire system. Most pension benefits are “richer” than what is typically available from an insurance company issuing a new annuity in the commercial market. Thus, when you are offered a buyout, you have to examine the whole package and ask yourself a number of questions, such as;

• What are the benefits offered versus what is available commercially?
• What is the financial status of my company’s pension fund and why are they offering a buyout?
• Do I need additional benefits for my family or spouse not covered under my existing plan?
• What happens if the PBGC takes over my benefit?
• When do I need the money?
• Would I rather have more flexibility and manage my own money with securities, or annuities, or both?
• Do I want a benefit/lump sum that could be passed onto my heirs? (Especially if you have a short life expectancy due to health)

If you determine that accepting a buyout is the best move, you still have the option of purchasing a level or increasing  now or in the future from an insurance company. We believe that highly rated insurance companies offer a higher degree of safety and stability than most financial instruments offer due to the high level of assets and reserves they are required to maintain. Also, with annuities, you have a number of options available that allow for income **guarantees combined with the flexibility of still maintaining full control over the majority of your dollars at all times.

In summary, if you are offered a buyout, take the time to carefully consider your options so that you can make the best decision possible. It would be wise to consult an advisor with experience and expertise who can help you carefully balance all the possible pluses and minuses prior to taking a lump sum buyout.

Here is an exerpt from Kiplinger’s that is a great read for anyone interested in more info on this topic.

Put Your Pension to Work

By Sandra Block, From Kiplinger’s Personal Finance, January 2016

How you decide to take this endangered asset may be crucial to a secure retirement.

Fretting about how to manage your pension is like complaining about the cost of winterizing your beach house. Lots of people would love to have your problem.

Only about 18% of private-industry workers have a defined-benefit pension. Less than one-fourth of Fortune 500 companies offered a defined-benefit plan to new employees at the end of 2013, down from 60% in 1998, according to Towers Watson, the human resources consulting firm. The number is much larger for public-sector workers; about 80% of them have a traditional pension.

If you’re eligible for a traditional pension, you’ll be faced with important decisions that could affect your financial security, and they’re usually irrevocable. That means when you retire, you’ll need to do more than turn in your security badge and wait for the monthly checks to roll in.

Backing away from defined benefits

The move away from traditional pensions reflects several trends. Employees are living longer, which increases the cost of providing a lifetime monthly payment. Low interest rates have reduced pension funds’ investment returns, requiring com­panies to put more money into their plans to avoid a shortfall. Government regulations designed to protect pension participants have increased the cost of offering and maintaining defined-benefit plans. Finally, companies used to view pensions as a way to attract and retain good employees. But these days, a benefit that rewards longevity is a lot less valuable because workers change jobs every 4.6 years, on average, according to the Bureau of Labor Statistics.

Even if you’re among the minority of private-sector workers covered by a pension, you’re not immune from efforts to reduce pension costs. AT&T, Boeing and IBM have joined other companies with big pension obligations in switching to a cash-balance plan. These hybrid plans combine features of a 401(k) and a traditional pension. Benefits from a traditional pension are typically based on a participant’s salary during the final years of employment, but with a cash-balance plan, benefits are accrued evenly over time. When a company converts, participants are usually entitled to the benefits they’ve earned to date under the traditional formula, with future benefits based on the cash-balance calculation. For longtime employees, the shift can result in a big cut in benefits.

Other companies have frozen pension benefits. The number of plans with frozen benefits rose from 10% in 2003 to 32% in 2011, according to Russell Research, a financial research firm based in East Rutherford, N.J. Many companies have cushioned a pension freeze by providing higher contributions to workers’ 401(k) plans. That could pay off for young workers who haven’t accrued much in the way of pension benefits, but a freeze can be costly for mid-career workers. Their future raises and years of service won’t be factored into their pension, and they’ll have less time to make up the difference by contributing to a 401(k), even if it comes with a generous employer match.

In the past, pension participants could count on the payouts they were promised once they started receiving benefits, but that’s changing, too. A new law allows multi-employer pension plans to cut benefits for current and retired workers. These plans typically provide coverage for union members who work for different companies, usually in the construction, manufacturing and trucking industries. Because of a decline in employment in those sectors, the plans have come under severe financial stress. In October, the Central States Pension Fund, a multi-employer plan that covers more than 400,000 participants, proposed cutting its benefits by an average of 22%. Some retirees will see their benefits cut by up to 60%.

A nice problem to have

Carin Hoch, 58, vice president of real estate for NuStar Energy in San Antonio, vividly recalls a meeting she and her husband, Ron, had about five years ago with their financial adviser to discuss financing a retirement home. After reviewing their salaries, retirement savings and other assets, the adviser turned to Ron and said, “She’s a keeper.” The reason: Hoch will retire with a traditional pension.

Hoch hasn’t decided whether she’ll take her pension as lifetime payouts or a lump sum when she retires. The Hochs have other sources of retirement income, including 401(k) plans, but having a pension in the mix has given them options they wouldn’t otherwise have. It has made it possible for Ron to retire at age 59 so that he can help care for Carin’s father, who is 93. It will allow Carin to retire in four to six years. It even helped them get a lower interest rate on the mortgage for their retirement home because it showed “financial stability.”

The couple plan to use the income from Carin’s pension and Social Security to pay for their living expenses. They’ll spend money from their 401(k) plans on travel and other discretionary items. Considering what can happen in the stock market, Carin says, having a pension “really gives us a comfort zone.”

Not only that, but retirees like the Hochs can invest money in their retirement accounts and other savings more aggressively, which offers the potential for higher returns. A monthly annuity payment “is like a bond portfolio,” says Charles Sachs, a certified financial planner in Miami. “You can buy riskier assets because you have this cushion of dollars coming in.”

Lump sum versus lifetime payout. If, like Hoch, you’re covered by a pension, this decision may be the most important one you’ll face when you retire. As employers look for ways to rid themselves of costly pension liabilities, they’re increasingly offering to pay departing employees a lump sum in lieu of a lifetime annuity payout. Figuring out which option is right for you will depend on a number of factors, ranging from the size of the lump sum to how long you expect to live.

See more information and details at Kiplingers.com

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Here’s a direct quote from the article:

“Some financial firms have considered lowering their recommended withdrawal rate to 3 percent but have found it hard to gain traction. That’s a safer rate, concedes T Rowe Price spokeswoman Heather McDonold, but it may be difficult and unrealistic for some folks.”

We might even agree with T Rowe Price’s statement for those individuals who are fully invested in the market. However, some of the other statements have us really “steaming,” not because they are lies necessarily, but they could be disastrous advice for some retirees.

The article quotes a “pioneer of the safe withdrawal methodology,” William Bengen who goes on to state that retirees can increase their withdrawal percentage to 4.5 percent if they include small stocks in their portfolio. He does not discuss volatility or the increased risk associated with this strategy. Failure to address risk or proper allocation could lead consumers and readers down an unrealistic and tumultuous path.

One of the biggest oversights of the article is the failure to mention the use of annuity allocations to **guarantee a larger withdrawal percentage than what can typically be done safely with a portfolio consisting of stocks and bonds.

Annuities typically offer withdrawal rates in the range of 4 to 8 percent depending on age; and the income from these products are the result of contractual **guarantees on lifetime income.

By utilizing annuities to secure the foundational income amount needed individuals and couples can then afford to take more risk with their discretionary dollars to capture higher potential returns. Retirement planning to accomplish goals and secure a safe secure income should be done with the assistance of a financial professional who can help you examine your assets and guide you in the process.

Failure to Plan is most likely a Plan to Fail!

Annuity Guys® Video Transcript:

Dick: Well, Eric, we’ve got a fun topic today.

Eric: Fun for some. If you’re that close to retirement and you’re starting to think about, “Gee, how much can I pull out?”

Dick: Right. Well and that’s really one of the jobs that we have as financial people to help our clients know what they can spend, and so that you don’t feel guilty about it and you know what you’re secure spending.

Eric: What’s the magic number? There are the old standards and when you start talking about withdrawal rates in retirement the old standard is 4.0%. I should say that’s been the standard since I’ve been in the business. At one point in time, I know it was 5.0%. Now it’s down to 4.0%

Dick: We’ve recently been backing it down to about 3.50%.

Eric: Now the chatter is, “Oh, maybe 3.50%.” There’s an interesting Reuters article that highlights it. In fact, they even mention here that there’s somebody that says maybe 1.50% in this low interest rate. How do you pick what’s that magic number, so that you can make sure you don’t outlive your income?

Dick: I think Eric, one of the things that we want to establish is that there are really two– there are probably more than two ways, but there are two, kind of obvious, different ways. Let’s call one the Wall Street way.

Eric: The “oops” method.

Dick: Yeah, “oops.”

Eric: And I kid, but there’s nothing better than your broker calling you up and saying, “Oops, we ran out of money.” I’m not saying that’s likely, but when you’re invested in it…

Dick: Or it’s dropped so much that you better back off on income for we don’t know how long.

Eric: The annuity method is more of a foundational plan. That is not to say that it’s the, be all and end all, but it’s a great way to protect the base line of what your income is.

Dick: So incorporating annuities, we look at in our planning, as more of a foundational part of the overall income plan, and yet when I read this Reuters article, I think we should spend a little more time on that and talk about it. I think, folks you want to look at that article and read it, because it does have some enlightening aspects to it. But they’re taking the Wall Street way and there is no mention at all of the possibility of using annuities for the foundational portion of your portfolio. It’s all in on securities and the right mix of securities and different strategies for pulling money out.

Eric: I find there are certain things in this article that I’ll be honest, actually frustrate me a little bit, because when it comes to, when people read something they tend to believe it, because it’s in print. There’s a guy here and I don’t know William Bengen, pioneer of safe withdrawal rate methodology. And one of the things he talks about is utilizing smaller stocks, small cap stocks to increase return, so that you can withdraw more of your money. Now my understanding of the market and small cap stocks, they tend to be a bit more volatile. There’s definitely the potential for that growth, but there’s also that potential for that drop.

Dick: Right. So you’ve got a corresponding risk and we would tend to think, when a client is in that type of an investment, that they’re taking on more risk. So when I look at, in all fairness what he’s suggesting in this article is that you pull back when your stocks are down and you increase what you take out when your stocks are up. But that doesn’t seem to work for our clients I mean as a whole. We might have a couple of clients that are in that discretionary where they could just be that flexible, but most people have a budget.

Eric: Yes. They have a minimum living standard, that they have that meet their basic necessities and if you can’t beat/meet those basic necessities, this doesn’t work. That choice doesn’t work. I think the best bet is truly a blending of the two methods, using a foundation building piece, whether it be an annuity or Social Security. Something that **guarantees that coverage across, and usually it’s a combination of multiple pieces that gets you there, and then you can use an equities based model, to increase and use that for a hedge for inflation, perhaps.

Dick: That would be your discretionary money. You know when I look at AARP, they put some information out on this but they also, in what I’ve read, they’re taking more of a Wall Street methodology in terms of without looking at annuities, saying take out a 4.0% rate of withdrawal. When you start looking at that, if you’re pulling that out at the wrong time, you’re going to have what’s called an unfavorable sequence of returns and you can really get into trouble.

Eric: We always talked about dollar cost averaging, when you’re buying in. You’re more likely to hit buying in at more low times over the course of a period of time, than you are high times. So it’s advantageous to keep doing it in regular intervals. Well, guess what? When you start making withdrawals, the same is true. You’re more likely to hit those consistent low periods, so you’re actually hurting yourself when you start pulling money out during those low periods.

Dick: Right. You have to be very, very careful. I know I’ve run some scenarios, and some modeling of you know, if you were pulling money out during certain years and sometimes just missing it by a couple of years. Like, if you started your withdrawals back in 1975, and you were pulling out a certain amount over a certain period of time, your portfolio would tend to look pretty good over an extended period of time. But if you just started in 1973, when there were a couple of bad years unexpectedly, you would have wiped your portfolio out in a much shorter time, 15-20 years.

Eric: Especially early on, when this unfavorable order of sequences or returns rather, is early on in your retirement those things can be devastating. I think what we’re looking at here as well we’re saying, guidance. Its take some of the guesswork out. Know that you’ve got a piece there that takes care of it. The standard bearers here for the market methodology, they’re giving you guidance, but you have to decide if you need to be more conservative or more aggressive or if you need a blend of the two to make yourself feel comfortable.

Dick: Eric, when we go into annuities it’s a completely different world, because we’re looking at contractual **guarantees. There’s no market fluctuation in the income side with contractual **guarantees. So we can help a client not only know what they’re going to have. But we can typically get a much higher withdrawal rate than what AARP and Reuters and certain financial advisers out there are recommending, and people are somewhat surprised by that. When we initially show them what they can pull out of their account, and pull out safely with contractual **guarantees.

Eric: That’s all about preserving your lifestyle, your standard of living. Knowing that you’re going to do it regardless of how long you live. I think those are the pieces that for me, I take solace when I’m working with somebody, knowing that we’ve protected a lifetime of foundation. I love working with people in the market, but we realized that they were going after potential gains, you know?

We’re not getting **guarantees, those are not contractual **guarantees. There are things that we’re doing, typically to combat inflation, get some of those consistent gains. We’re talking about asset allocation, not just being in the equities market, so obviously when we see somebody advocating for small cap stocks, it gets my blood a little boiling, because it can be a piece of it but you don’t…

Dick: It sounds good just to read it, but when you actually look at that and look at the possible negative side of that, it’s not very pretty. So again one of the things, I think that we want to stress Eric, and just for you folks to give a little better understanding of what’s possible with contractual **guarantees. Typically when you’re around 60-years-old, we can get out kind of on a minimal basis for joint income, for a husband and a wife, somewhere around 4.50%, if it’s a single person, maybe closer to 5.0%. Then add to that, there are some ways to structure annuities so that you can get an inflation hedge, and if that is done properly we’ve been able to show illustrations right from the company, where after 20 years they’d be pulling out what, Eric?

Eric: We’ve actually seen withdrawals as high as 9.0%.

Dick: Right, in that range.

Eric: Obviously caps have changed, and things are a little bit more– not quite as the participation rates and those things have pulled things back, so we don’t anticipate if things stay where they are today you would necessarily get that, but…

Dick: But it could still be up in the 7.0-7.50-8.0-8.50%. So again, what we’re talking about here is that you start off with, say half a million dollars, and you start off by pulling out, say $25,000 a year and within 20 years to maybe, within 30 years-time, you’re pulling out almost double that, so instead of $25,000, you’re pulling out nearly $50,000.

Eric: Each year.

Dick: Right and so you may have used all your money. You may have spent it.

Eric: It’s not a plan that is designed for giving money to the heirs.

Dick: Giving a lot of money back to the kids, unless it’s the early years. The early years you could die unexpectedly, the kids could get a lot of money.

Eric: Right, so it is that. But we like this a lot for hedging against inflation, and basically taking care of your standard of living, that gets those bumps each year.

Dick: Right and that protects other assets, if you’ve got that foundational income, so those assets can grow and go on to the kids. So yeah, there are a lot of things that you can do. You don’t have to look at the annuity way, as the only way. You don’t have to look at the Wall Street way, as the only way. The best is to blend those into a very balanced allocation strategy and balanced portfolio.

Eric: Yes, it’s all about planning. You know you have to plan to succeed. What’s the saying?

Dick: If you don’t, if you plan to, I can’t even say it now. Plan to fail or fail to plan.

Eric: If you fail to plan, you plan to fail and I guess that’s the summary statement for today.

Dick: Yeah.

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