Ten Common Retirement Planning Misconceptions

As many of you know, part of what I do is to oversee the production of the Senior Review as owner and editor-in-chief. This has been a part-time passion of mine for about five years. My full-time passion is working with people over 60, specializing in broad-based retirement planning that brings greater safety and security to my clients during their retirement years. As a retirement planning specialist, I don’t represent or sell any product or strategy that carries stock market risk. Why? For most people over the age of 60, keeping their money safe is one of their primary objectives when planning for their upcoming or remaining retirement years.

In an effort to help you avoid implementing an inappropriate strategy or making a bad purchase decision, I would like to address ten common misconceptions many seniors have learned from the media, well-meaning friends and family, and even financial professionals. So here we go!

Misconception #1: “It’s an IRA, so I can’t move it without paying taxes.”

This is one of the most common misconceptions I hear. The fact is that IRA accounts and other qualified plans like 401ks are very mobile, and a person can typically move them to a wide variety of other IRA accounts without incurring any additional taxes, if done correctly through a trustee to trustee transfer or rollover. So, if you are concerned about the safety of your IRA and want to move it to a more secure place, be aware that you can reposition those funds to a safer locale without incurring a taxable event.

Misconception #2: “If I stay in the market, I have the best chance of keeping up with inflation.”

This is one of the biggest arguments money managers make for keeping your funds in the stock market—and with them. This may have been true before the year 2000, but things have changed; the market does not seem to be the same as it once was. In fact, the S&P 500 has grown only about 8% over the last nearly 13 years. That’s an average grow rate of just over .5% per year since June of 2000. Those who moved their funds out of the market in the year 2000 to safe, fixed products, such as the ones I offer to my senior clients, have averaged somewhere between 3% to 5% growth per year. In other words, generally speaking, the stock market has not lived up to the promise of higher returns and keeping up with inflation over the last 13 years. Also, things may look pretty rosy in the market right now, but if we experience another market correction, so much for keeping your money safe, let alone keeping up with inflation.

Misconception #3: “I can make a guaranteed interest rate of 5%, 6%, or 7% for up to 10 years on my annuity.”

This is the biggest and, in my opinion, most dangerous of all retirement misconceptions around. Every week, I meet multiple people who have moved retirement funds to a variable annuity with the belief that, at a minimum, their money will be growing at a generous, predetermined guaranteed rate of interest of 5% to 7% per year. Although it is true that many variable annuities offer a nice, guaranteed “roll-up” rate, this roll-up rate does not guarantee growth to your actual account value. Instead, a roll-up rate is a separate, non-cash account used to calculate future income from your annuity, also known as a guaranteed income base.

The problem is that if a person does not live long enough, no one will ever be paid the entire roll-up or guaranteed income base value. Don’t get me wrong—a guaranteed roll-up rate and income base calculation is not a bad thing. On the contrary, this account can offer guaranteed income for life or even two lives. The problem is that most financial professionals do not fully disclose how a roll-up rate and income base work and simply sell them as a guaranteed interest rate on their money, which is false.

It’s important to understand how a guaranteed income base using a roll-up rate actually works and how it may or may not fit into your overall retirement plan before purchasing any annuity with a guaranteed income feature.

Buyer Beware.  When attending a retirement seminar, beware of those who lure you in with a nice incentive for attending and bill their workshops as educational but in the end, deliver something very different.  Typically, a theme like Social Security education will take at least 45 minutes to an hour to do justice to the topic. Some who advertise educational workshops are not experts in the field and will spend a minimal amount of time on the actual topic, only to switch quickly to the real reason they invited you to the workshop…to hear a high pressure product sales pitch.  Many time these sales pitches are riddled with product misrepresentation and half-truths. One such seminar claim is the promise of guaranteed generous interest rates in a low interest rate environment. Remember that if it sounds too good to be true, it probably is and you are only being offered part of the story. There are a lot of these bait and switch seminars being done today.  Again . . . . Buyer Beware!

Our promise at the Senior Review.  When you attend a seminar advertised in and sponsored by the Senior Review, whether on Social Security, the Pension Protection Act or any other topic, you will participate in a truly educational experience…one without baiting and switching or high pressure sales tactics. So when you attend a seminar offered by the Senior Review you can be assured that you will have a truly educational worthwhile experience.

Misconception #4: “My variable annuity fees are only about 1% or so.”

I have met with many clients who have previously purchased a variable annuity. When asked about how their variable annuity works, in addition to believing that their roll-up rate is a true interest rate, the clients also believe that the annual fees are about 1% or so. The truth is that the1% (or so) fee is typically a rider fee. Most disconcerting, in many cases it is the only fee disclosed to them by their money manager when they purchased the variable annuity.

In addition to 1-2% in rider fees, variable annuities carry mortality and expense fees, administration fees, and sub-account fees. When all is said and done, many variable annuity owners are dismayed when they realize that their account value is being charged 3% to 4% annually—fees charged against their funds whether or not their account makes money.

Misconception #5: “My variable annuity’s guaranteed death benefit insures a return of my money to someone.”

The guaranteed death benefit feature offered with some variable annuities is a good feature…maybe. The problem is that many people who own a variable annuity believe that their guaranteed death benefit insures, at a minimum, a return of their premium or deposited amount, less withdrawals, regardless of what happens to their at-risk account value. This is partly true. A little-disclosed fact is that when withdrawals are taken from the annuity, the deductions made to the guaranteed death benefit are done on a pro rata or proportionate calculation. In other words, if your variable annuity account value has lost money, then for every dollar you withdraw from your annuity, more than a dollar will be deducted from your guaranteed death benefit amount, making your death benefit a bit less guaranteed than you might expect.

Misconception #6: “Now that I’m retiring or retired, my money manager can offer all the appropriate financial products I will need in retirement.”

Probably not true. Even the best financial professionals have a limited number of tools they can offer you. As you get older, the once-appropriate strategies offered by your trusted financial professional may not be appropriate for you anymore. Worse yet, more retirement-appropriate, safer strategies are most likely not offered by or promoted by him either. In other words, in order to make the best decisions about your money, you may have to reach out beyond your current financial advisor to shore up your retirement plan and secure your financial future. Remember that variable annuities, although they may sound appropriate, many times work very differently than the seller says and are generally inappropriate for the risk-averse senior.

Misconception #7: “Annuities are bad.”

First, annuities are very different from those our parents and grandparents may have owned. Those old, outdated annuities had a variety of problems. Second, those who say annuities are bad may not understand the broad spectrum of annuities that are available today. Third, those who are attempting to discourage you from moving your money away from a managed investment account to a safer place may have their best interests at heart rather than yours.

The fact of the matter is that for the risk-averse, preservation-minded senior, a better general statement would be this: “Variable annuities may be much less appropriate for you than fixed annuities.” Understanding your options and making an informed decision is always better than simply taking at face value a broad, unsubstantiated claim about a particular retirement strategy.

Misconception #8: “I’m too old to purchase life insurance.”

In many cases, purchasing life insurance between the ages of 60 and 80 (or so) may be a fantastic decision. The key here is to purchase the right kind of guaranteed life insurance for the right reasons at the right time. There are three reasons for purchasing life insurance as a senior: 1) to cover a short-term debt; 2) to replace lost income at the passing of one’s spouse; or 3) as a productive way to leave money to children or other beneficiaries after you are gone.

Be aware that many agents typically sell universal life insurance as a guaranteed or paid up policy. However, some agents create life insurance illustrations with unrealistic assumptions. Illustrations that include unrealistic assumptions may lead a potential buyer down a primrose path that could—and many times does—end with a lapsed policy before the insured has passed away, yielding no benefit to the insured or beneficiaries, despite all the premium they have paid into the policy over the years. If you have a universal or flexible premium life insurance policy, you may want to get a current “check-up” on the health of the policy. What you find out may both surprise and concern you. Remember, in this case, what you don’t know can hurt you.

Misconception #9: “Long-term care insurance is a bad idea.”

For years, you have had just three options for paying for long-term care: self-insure and pay for your care from your own assets, buy a traditional long-term care insurance policy, or rely on Medicaid once you have spent down all your assets. Traditional long-term care insurance has been a decent option, but it has three inherent problems: 1) it’s expensive; 2) premiums rise over time; and 3) if you don’t use it, you lose the premium you have paid into the policy.

Traditional long-term care insurance was the only insurance option until 2006, when legislation was passed approving a new type of long-term care insurance. These new products became available to consumers in 2010 from a handful of insurance companies. They offer features such as a return of premium, a guaranteed leverage benefit paid to loved ones if insurance is not used for long-term care costs, no rising premiums, and more. These new products are terrific! Anyone interested in addressing the probability of long-term care costs should learn about them and how they work before making any kind of long-term care insurance purchase decision. Attend one of our Pension Protection Act seminars advertised in this issue to learn more about these new long-term care products.

Misconception #10: “I can’t make any money in a safe place.”

It’s true that interest rates offered by banks on CDs and money market accounts continue to be deplorable. So where can you put some of your money where it is safe but still has the opportunity for good growth potential? The answer lies in a special type of fixed annuity introduced back in 1995. This has become a key piece of a safe and secure retirement plan for many risk-averse seniors. Most likely, this annuity is not sold, promoted, or even liked by your financial professional. Why? Because he either cannot sell this type of annuity, has no incentive to sell them, or just plain believes that all of your retirement needs can be met by him and his plethora of risk-oriented products. But the reality is that those who held these “safe” annuities in 2000, 2001, 2002, and 2008 never lost a dime to stock market losses and have typically done better than the average investor over the past 13 years. Yes, there is a safe place for your money. Whatever plan you make, the key is to be informed about all of your options, not just the ones your money manager may offer.

In Summary

I hope that this information has been of value to you. If it helps just one Senior Review reader make a better retirement planning decision or avoid a retirement planning mistake, the article will serve its purpose. Also, if you are interested in learning more about appropriate and safe retirement strategies that may best serve you in your set of unique circumstances, give me a call. I will be happy to sit down with you in the comfort of your home or at my office and have a candid, no-pressure, no-cost, no-obligation helpful discussion about your future. I promise you will be glad you did as you will become armed with information that will help you as you continue to make decisions and plan for your retirement future.

Call me at your convenience at (801) 683-4333 or (801) 628-1032. I look forward to hearing from you. Boyd Casselman—In-Retirement Planning Specialist and Editor-in-Chief, Senior Review.

By Boyd Casselman