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The Journey: Risk tolerance matters when making cash-flow decisions

McClatchy-Tribune Information Services

November 17, 2014


Q. Iím retired, 71, and living on my Social Security and a pension totaling $3,200 monthly. I have an IRA worth $412,000 sitting out of the stock market and another $38,000 in a savings account. I donít trust the stock market and believe it to be overvalued. Iím panicked and frozen. I want to generate cash flow but also protect the principal. Iím thinking of a fixed annuity. Iíve been stuck like this for three years. Any ideas you can share would be wonderful.

A. Rather than lurching toward a specific product, why not consider first how much risk you need to take?

"The real question is, how much does it cost to live your current lifestyle and are you doing that without tapping into the liquid resources?" said Joshua Kadish, a financial adviser and partner with RPG-Life Transition Specialists.

"A lot of people come to us and say they want stocks, or a certain bond or an annuity," he said. "We know they need cash flow, but they donít understand the differences among their options. Cash is inefficient, but if it works for someone, why put them in a situation where theyíre not comfortable?"

Kadish typically avoids fixed annuities, because of the low interest-rate environment, and equity-indexed annuities, because of their costs, but he has been using FDIC-insured bank products such as principally protected CDs for clients with very little risk tolerance.

If youíre healthy and expect to live another 20 or more years ó and are withdrawing more than about $20,000 from the portfolio annually ó then sitting on your hands isnít a good option much longer. Even if withdrawals are modest, the effects of inflation could ravage your nest egg over time.

Plain-vanilla CDs offered by online banks were paying about 2.3 percent annually for five-year terms recently. Thatís certainly better than many local bank savings accounts.

Q. In a recent article, it is mentioned that Social Securityís maximum individual benefit for workers retiring at full retirement age is $2,663 per month. I have inquired about my own in the past and although Iím not near the full retirement age, have found that my benefit was somewhat short of this amount.

How does a person increase their benefit based on full retirement age? Is it based on your total earnings and amount contributed? And will my benefit increase each year up until retirement? Is there a formula that we could use to assist us on calculating our benefit? These questions would be without adjusting for early retirement or waiting until 70 to start withdrawals, as I know this would adjust our benefit accordingly.

A. Social Security benefits are based on your payroll taxes paid, but not necessarily your total earnings. For 2015, earnings up to $118,500 are subject to Social Security taxes. Benefit estimates from the Social Security Administration assume you will continue to work at your current salary until retirement age. You can try out different scenarios at the SSA website, ssa.gov/retire2/estimator.htm.

Good for you for taking an interest in learning how these benefits are calculated, because there is a lot of confusion around it, Kadish said.

"After sitting with thousands of people over 20 years, I will tell you that assuming (clients) know nothing about this has been a good strategy," the adviser said. "Iíve worked with a lot of intelligent, successful people, but this is not their thing."

Once youíre up to speed on your own benefit, youíll then need to figure out your best claiming strategy, which could be different depending on whether you are or were married or whether youíll be working after you begin taking benefits.

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