Protecting a Retirement Plan by Getting More Creative

The Money Issue

According to some recent studies, 4 out of 10 working Americans don’t have a retirement plan in place, either at work or elsewhere. And even for those who do, say experts in this field, getting it well protected against future shocks is harder than it once was.

Why? One reason, notes R. Dennis Vogt, a partner at Alloy, Silverstein, Shapiro, Adams, Mulford, Cicalese, Wilson & Co. in Cherry Hill, is that in years past, someone else used to do much of the heavy lifting that must now be done by individuals. “My father worked at a company that did it for him with the company’s pension plan,” Vogt says. “I have my own 401(k).”

These days, in contrast, there are also a lot more retirement plan products to choose, and older plans don’t always provide the reliable returns they once did, adds Kenneth Bagner, a member of the firm at Sobel & Co. in Livingston. Competition for funds that might go toward retirement is increasing, as well. “Your own kids’ school bills plus help with your parents’ assisted living expenses can compete for funds for many people in today’s so-called ‘sandwich generation.’”

What things like these often mean for retirement planning is summed up by Peter Hoglund, financial planner with AEPG Wealth Strategies in Warren. “Those retiring now as well as in the next 5 to 10 years should expect to be more creative with [their] retirement funds.”

Longevity And Getting Creative 

The biggest asset you have in creating a sound retirement plan, according to Bagner, is time. “Time to make up shortfalls … compensate for mistakes … time for your money to grow.” The corollary here, of course, is that the best way to protect a retirement plan is to start one as early as possible.

Beyond doing this, realizing another element of the time-retirement planning relationship is very important – the fact that more and more people are living longer and longer. Protecting a plan so it can provide needed support for living into one’s 80s or 90s thus comes down to “maximizing out” a retiree’s assets, Bagner states. This is often linked to one’s anticipated Social Security payments and when to start collecting them. “There are a lot of strategies linked to Social Security and when to tap it,” he says.

Such strategies, in turn, often come down to when or whether a person should stop working. “My belief is that everyone should work past 70 if they can,” Vogt says. “There’s a positive influence here on their [retirement] planning. Their assets will work longer … reducing the amount they have to take out sooner.”

“Tapping Social Security at 62 is almost always the wrong thing to do,” Hoglund says. It’s especially bad for couples with two incomes. When the compounding factor is figured, the losses to a retiree are very significant, he says.

Life insurance is generally just viewed from an estate planning – not from a retirement planning – perspective. But, notes Hoglund, the insurance industry has developed some interesting products that might be considered by those worried they might outlive the money they have set aside for retirement.

Scott Coppeto, an advanced planning solutions specialist with Capitas Financial in Bedminster, explains how this might work. Some permanent life policies, he says, have riders people can request that allow them to tap into death benefits to cover their own needs [e.g., healthcare] while still alive. “If properly structured,” he says, “this money is tax free. When I explain this option, my clients, especially upper income clients, generally like it because they get back more than they put in.” If the benefit isn’t used, “the family gets the death benefit … it removes from the equation the ‘if-you-don’t-use-it-you-lose-it’ scenario.”

A long accepted rule of retirement plan investing is that you should be more aggressive in the early stages (perhaps even 100 percent in stocks if you’re just 30), but get more conservative and bond oriented as you approach your actual retiring date. Traditionally, says Vogt, at 50, your allocation might be 60 to 40 stocks versus bonds, which would creep up to 40 to 60 at retirement. But given present low bond rates, “a person might stay at a 60 to 40 [allocation], depending on their risk tolerance.”

In general, Hoglund says, for those retiring in the next 5 to 10 years, “it isn’t a time to become complacent. It is often a person’s peak earning period … [with good] opportunities to build up the [retirement] pie right up to the actual time of retirement.” Even after retirement, he adds, the idea to become more conservative may be changing.

Fees And Early Withdrawals

Two of the greatest threats to retirement plans are fees charged by mutual funds and other investment vehicles that are elements of a plan, and early withdrawals from tax advantaged elements of a plan. With regard to the former, John Bogle, founder of the Vanguard Group, is often quoted about the highly negative effects fees can play on net returns of various investments.

While fees are thus certainly something to consider in retirement planning, “no one can measure what is a fair amount of fees” because other factors play into things here, notes Vogt. Elaborating on this, Bagner says: “Fees are just part of the mix. … Higher quality in the same class of investment might justify the fees. It’s the balance that’s important.”

When it comes to early withdrawals, a certain amount of flexibility also seems appropriate. Yes, as Hoglund notes: “Tapping retirement accounts [prematurely] is a very bad idea.” In certain circumstances [e.g., need to pay a major medical bill], you can avoid a 10 percent penalty. However, while even paying a penalty may not seem so bad, “you are also losing the tax benefits you have built up … so you are not only mortgaging your future, but losing the past gained benefits.”

In this imperfect world, however, such thoughtful considerations don’t always apply. “The problem is usually that there isn’t a good second solution,” Vogt says.

When any serious life event does come along, he concludes, such as an unexpected job loss, “it is often wise just to come in and update your retirement plan.”


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