How to Know How Much Life Insurance You Need

How to Know How Much Life Insurance You Need

An important part of responsible financial planning is to protect yourself against risk events that can be financially devastating. One such event is a premature death. When trying to understand how much life insurance you should own, you should take into consideration two things: 1) What lump-sum expenses you might want paid for, for example a mortgage, college tuition costs, other debts, and funeral expenses, and 2) Any income that you and/or a survivor might want replaced, such as a prior salary. Generally you don’t want this salary to be replaced indefinitely, but rather a common practice is to replace it until the survivor reaches retirement age. This calculation is a bit too complex to work out here, but the proper way to calculate this income need is to ensure that it inflates each year and will keep pace with inflation. One very crude way to get a ballpark estimate of how much life insurance it would take to create an income stream is simply to capitalize an income need. For example, if you think that you need $2,000 a month in replaced income ($24k a year), then simply divide $24,000 by an interest rate at which you think you could invest the funds to spin off $2,000 a month in income. So, $24,000 divided by 8% results in a capital need of $300k. To put this differently, if you invested $300,000 at 8%, it could generate $2,000 a month in income. Again, this is very crude and inaccurate, and it shouldn’t be used for anything more than rough estimates (it’s inaccurate because it doesn’t take into account taxes...
Why It’s So Hard to Spend Down Your 401(k) in Retirement

Why It’s So Hard to Spend Down Your 401(k) in Retirement

Will I underspend my assets? Will I run out of money? These are questions that retirees face every day as they decide how much to withdraw from their retirement plans. In a recent MarketWatch article, Alicia Munnell expresses concern about the millions of Americans who will be entirely reliant on their 401(k) assets at retirement: At a recent conference, retirement experts concluded that the lack of an easy drawdown mechanism in 401(k) plans was the major challenge facing the 401(k) system.   In 2014, the Treasury Department and the IRS issued guidance that made longevity annuities accessible to 401(k) plans and that enabled target date funds to include annuity contracts either as a default or as a regular investment option. But individual plan sponsors feel under siege by lawsuits and see little payoff to being innovative. At the same time, Congress is unlikely to mandate that annuities be a part of 401(k) arrangements.   So we are at a standstill. Millions of Americans — having been told that their retirement plans are automatic — will be handed a pile of money and told they are on their own. Neither academics nor policymakers really have any idea how they will behave. Recent studies show that people draw down their balances in retirement much more slowly than expected. But most of today’s retirees with a retirement plan have an old-fashioned defined benefit plan, so these studies have little to say about the likely behavior of those retiring entirely dependent on 401(k) plans. Munnell is onto something here. Working with retirees every day, our firm has concluded that a major risk to...
Should You Invest in Digital Currency?

Should You Invest in Digital Currency?

I recently spoke with someone who told me that he removed all of his cash from the bank and 401(k) and invested it in digital currency. Indeed, some are finding that investing in digital currencies such as Bitcoin and ether can earn a high rate of return. But before you join the stampede into the world of digital currency investing, consider this recent news excerpt from Seeking Alpha: Cryptocurrencies took a beating this past weekend. Bitcoin traded as low as $1,836, down about 8% on the day, and almost 40% from its high of $3,018 on June 11, while ether plunged almost 20% to $155, knocking off about 60% from its high of $395 on June 13. The selloffs are yet another stark reminder that digital assets remain highly speculative trading vehicles. Moreover, the co-founder of ethereum network recently told Bloomberg News that the digital currency ether is “a ticking time-bomb.” “There’s an over-tokenization of things as companies are issuing tokens when the same tasks can be achieved with existing blockchains. People are blinded by fast and easy money.” Ah, yes. “Fast and easy money.” Digital currency investing may be the sexiest investment that’s come along in a while, but the allure of fast and easy money has been around for millennia, and there’s no shortage of people who have been devastated in their pursuit of riches. Of course we’ve seen this before. One might recall the late ’90s when high-tech mutual funds were creating nothing short of a feeding frenzy on Wall Street. But one also shouldn’t forget the countless people who lost everything after they made huge bets in technology only to watch many of their investments go bankrupt. The...
Don’t Be Too Quick to Judge Medicaid: You Might Need It in Retirement

Don’t Be Too Quick to Judge Medicaid: You Might Need It in Retirement

Long-term care planning is an important part of retirement planning and something we regularly talk to our clients about. One thing people often don’t realize, as Jordan Rau in this helpful NY Times article points out, is that Medicaid plays a vital role in long-term care planning and currently accounts for 42 percent of Medicaid expenditures. Some also don’t realize, as Rau continues, that many recipients “entered old age solidly middle class but turned to Medicaid, which was once thought of as a government program exclusively for the poor, after exhausting their insurance and assets.” Medicaid, then, isn’t a merely a system for the poor who need food assistance, but rather it’s an important social safety-net for retirees who can’t keep up with the pace of health care costs: A combination of longer life spans and spiraling health care costs has left an estimated 64 percent of the Americans in nursing homes dependent on Medicaid. In Alaska, Mississippi and West Virginia, Medicaid was the primary payer for three-quarters or more of nursing home residents in 2015, according to the Kaiser Family Foundation.   “People are simply outliving their relatives and their resources, and fortunately, Medicaid has been there,” said Mark Parkinson, the president of the American Health Care Association, a national nursing home industry group. With all of the proposed changes taking place in congress, the full article in the NY Times is worth reading, and I think it provides a helpful perspective on the need for health care reform and the need for responsible, proactive retirement...
Why You and Your Partner Might Not Want to Retire Together

Why You and Your Partner Might Not Want to Retire Together

Are you thinking of retiring at the same time as your spouse or partner? It might not be the best idea. Staggering retirement can take advantage of higher Social Security benefits, longer access to health insurance before Medicare becomes available, and larger retirement plan withdrawals. Investopedia author Mark P. Cussen and investment advisor Morris Armstrong explain in this helpful article that “Unless couples are the same age, and in the same health, it usually makes more sense for one person to retire earlier. There can be both financial and relationship benefits,” says Morris Armstrong, registered investment advisor, Armstrong Financial Strategies, Cheshire, Conn. Financially speaking, the advantages are threefold. When one spouse works longer, the amount of Social Security benefits the couple is entitled to will increase. In addition, the continued income from the working spouse gives the couple a few more years to save for retirement. Finally, a spouse who works an extra three to five years will likely have a shorter period over which to draw on his or her retirement assets, allowing for larger withdrawal amounts each year. And, given that retirement is a such a significant life transition for most people, Cussen explains that there are often emotional considerations that should be taken into account when couples are deciding whether or not to retire together: Retirement in the modern era can be an emotionally complex proposition. Losing one’s sense of identity through work can be a major adjustment for some, while others are able to make this transition with relatively little difficulty. When a working couple retires, they suddenly find themselves at home together all the...