The most powerful income tool you’ll find

We’re living longer. In fact according to the Centers for Disease Control if you are a 65-year-old male, you can expect to live another 17 years … 19 more if you are a female. That’s the good news. The not-so-good news is that your retirement next egg might not last as long as you do. There are several theories on how much you could safely withdraw from your investments and have a decent chance of not running out of money during retirement. Probably the most common is the 4 percent rule. This assumes your portfolio is split 60/40 among stocks and bonds with annual returns of 7-8 percent. It also assumes your portfolio will fluctuate 10 percent a year and we’ll have 3 percent inflation. Although this may sound logical, there are a few potential flaws … First, is the 7-8 percent return. Since 12/30/27, the S&P 500 has averaged a 5.35 percent return. For the past 10 years, it’s only 2.66 percent. Five years is 2.95 percent. Bonds? Well, the Barclays Capital Aggregate Bond Index, which is often used to represent investment grade bonds trading in the U.S., averaged 6.44 percent over the last 5 years. You might happen to hitch onto a hot-shot fund manager, or you might be lucky enough to pick a few good stocks or bonds on your own. But again, that would be an exception, which brings me to the second flaw … Hoping the markets will go up and down by only 10 percent is a pretty rosy prediction. The Dow dropped 22.6 percent on "Black Monday" October 19, 1987. And the Nasdaq was down over 60 percent after the tech blow up in 2000 followed by the September 11 terrorist attacks. Then look at 2008 after the housing bubble exploded ... For the year, the Dow fell 33.8 percent, its worst drubbing since 1931 and its third-worst year ever. The S&P 500 fell 38.6 percent, its worst performance since 1937 and third-worst loss. The Nasdaq lost 40.5 percent, its worst year ever. Granted, many investors who hung in there have recovered their losses. Some are substantially ahead, particularly those who continued to invest month after month while prices tumbled. But there lies the problem … Most people panicked. They bought high and sold low. I’ve seen this first hand with clients who when they’re initially making an investment say they can handle losses. Yet when they’re looking at their statements and see a 20 or 30 percent loss, they don’t have the stomach for it. They want out. Now for my final point … the 3 percent inflation. Since 1913, inflation has run about 3.4 percent a year. However, our country is facing much different challenges than in the past. Out of control government spending, non-stop entitlement programs and a money printing machine that is running 24/7. Just to name a few. This tells me that inflation is bound to go up significantly over the foreseeable future. And counting on a meager 3 percent rate is just plain dangerous. Therefore, I suggest you take a look at an income annuity as part of your retirement planning. Of course, there are tradeoffs. For instance, you give up control of your money. And to get the maximum income, your survivors are left with nothing. What’s more the income generally does not go up each year. But no other tool provides a similar guarantee of income for as long as you live. Now I’m not saying you should put all of your next egg in an income annuity, especially now with interest rates so low. Yet you might consider staggering multiple smaller buys over several years in case rates go up. That way you would always have money coming in each month to help pay ongoing expenses, such as a mortgage, rent or even to help fund your travel plans. The alternative? Roll the dice and take your chances. You might win, or you might end up broke and dependent on others for your survival. Best wishes, George P.S. I’m now on Twitter. Follow me at http://twitter.com/efinancialwrite for frequent updates, personal insights and observations on how to have a healthly retirement. If you don’t have a Twitter account, sign up today at http://www.twitter.com/signup and then click on the ‘Follow’ button from http://twitter.com/efinancialwrite to receive updates on either your cell phone or Twitter page.

Use IRAs for college ... but only as a last resort

Spring is in the air. Many families are preparing to send a child or grandchild off to college. But the average cost for tuition and fees can easily run $35,000 or more. And the cost is rising faster than medical care and as much as three times consumer prices. Therefore, students borrow because they see no other way. The problem is Americans now owe close to $1 trillion on their student loans — more than on their credit cards! When they leave college, the majority of student loan borrowers struggle to repay their debts. So it’s no wonder parents and grandparents often raid their IRAs instead of letting the kids take out student loans. But that helping hand can be a huge blunder. You would be correct in saying that money you take from a traditional IRA to pay college expenses won’t get hit with the under 59½, 10% penalty. You’ll still owe income tax though. See IRS Publication 590, page 53 for the details. However, there is a pitfall … you can’t put the money back. That means the only way to replace the funds is with your ongoing contributions. Plus every dollar you take out of your IRA is one less dollar you have building up tax-deferred to fund your retirement. So by all means, only use your IRAs to help with college expenses as a last resort. And if your loved one is years away from heading off to college, there are other alternatives, such as 529 savings plans that are meant for college savings. 529 plans offer a lot of flexibility in the amount of money you put away, it builds up tax-deferred and you maintain control over the account. Many of the major mutual fund companies offer good information on their 529 plans. Or you could check out what the IRS has to say, just click here. Learn the ins and outs of the loans and saving programs available to help college-bound kids. You’ll stand a much better chance of having they finish their education with as little debt as possible, without jeopardizing your retirement nest egg. Best wishes, George

Workers losing confidence

According to the Employee Benefit Research Institute's annual survey on retirement, 27% of respondents said they are “not at all” confident about having enough to retire comfortably, up from 22% last year. Workers are bumping up the age at which they plan to retire and continuing to work during retirement. The percentage who expect to work past 65: 36% this year, from 11% in 1991. There are many reasons why workers are delaying retirement, including:

Poor economy

Lack of faith in Social Security

Change in employment situation

Can’t afford to retire

Cost of living in retirement will be higher than expected

Want to be sure they have enough money to retire comfortably

Click here to read the complete survey. So what can you do to give yourself a better chance of retiring when you had hoped? You might consider a tax-deferred annuity … A report by The Insured Retirement Institute found that the tax deferral of annuity earnings is of greatest benefit to middle income Americans, who comprise the largest segment of annuity owners. Also with 80 percent of annuity buyers having incomes less than $100,000 and 64 percent earning less than $75,000, insured retirement strategies clearly play a significant role in the retirement income planning of middle class Americans. To learn more about annuities and The Insured Retirement Institute, click here. Best wishes, George

IRS real estate listings

Looking to get a deal on real estate, cars … even income from a litigation case? Well, those are just a small sampling of stuff that the IRS has seized and is looking to sell. Go to the IRS Auction home page to see the full list what is coming up for auction around the country. And you can also subscribe to e-mail updates. Happy shopping! George

You get three extra days!

This year, your tax return is due Monday, April 18 rather than the regular April 15.

But don’t thank Tim Geithner and his IRS posse for the extra time. It’s because the District of Columbia observes Emancipation Day on Friday, April 15, even though it falls on Saturday, April 16. And filing deadlines can't fall on Saturdays, Sundays or holidays.

Never heard of Emancipation Day? Let me enlighten you …

According to Wikipedia, on April 16, 1862, President Abraham Lincoln signed the Compensated Emancipation Act for the release of certain persons held to service or labor in the District of Columbia. The Act freed about 3,100 enslaved persons in the District of Columbia nine months before President Lincoln issued his famous Emancipation Proclamation. The District of Columbia Compensated Emancipation Act represents the only example of compensation by the federal government to former owners of emancipated slaves.

So go ahead and use those three extra days to procrastinate a bit longer. And come next Monday, if you still haven’t found the ambition to get that pesky 1040 filled out,

you can always opt for a 6-month extension.

Happy Returns!

George

CLASS Act loses major supporter

Back on October 29, 2009, I gave you a brief overview of the Community Living Assistance Services and Support Act (CLASS Act), the long-term care insurance plan that’s within Obamacare. And as I wrote, the plan wouldn’t do a heck of a lot to help with expenses in case your health changed. Well, look at what someone else has to say: According to The Washington Times, Health and Human Services Secretary Kathleen Sebelius, in a February 16 testimony before the Senate Finance Committee said that the CLASS Act “is at significant risk for failure.” And it’s not even off the ground yet! You can read the full Washington Times article by clicking here. The point to take away here is that you cannot count on the government to protect your assets and provide for you as you get older. The time to start planning is today. Best wishes, George P.S. I’m now on Twitter. Follow me at http://twitter.com/efinancialwrite for frequent updates, personal insights and observations on how to have a healthly retirement. If you don’t have a Twitter account, sign up today at http://www.twitter.com/signup and then click on the ‘Follow’ button from http://twitter.com/efinancialwrite to receive updates on either your cell phone or Twitter page.

Never rule out seller financing

I got an e-mail this week from a reader who wants to invest in income-producing real estate. Without going into all the details, he seems well-versed in construction and could handle repairs himself … a very important aspect of becoming a landlord. However, he lacks the cash for a sufficient downpayment and is considering taking out an equity loan on his home to come up with the funds. As an alternative, I suggested he consider seller financing. But he is concerned that that is too risky. Here is a recap of my reply: Sean, you’re right … seller financing can be risky. To me, a big risk is that sellers generally will only provide short-term financing. For example 30-year amortization with a 5-year balloon. That could leave you scrambling in five years to find financing. And you might have to pay a higher interest rate than what banks charge. Plus you don't have much negotiating power on the price when you're asking the seller to carry the mortgage. But I'd rather take the risk of possibly loosing a rental property back to the seller than risk loosing my homestead. The key is to do your homework and carefully look at every potential expense that could impact the cash flow. You just might come across a seller who owns the house outright and has to move. Could be because of job relocation, personal reasons ... you never know. If the price is right and you strongly believe that you can generate enough positive cash flow to accumulate a decent down payment over the course of a few years, you could be in a position to get a conventional loan by the time the balloon is due. Anyway, never rule anything out, including seller financing, especially when you don’t have enough cash for a downpayment or otherwise can’t qualify for a traditional mortgage. Best wishes, George