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Ethnicity Alone Doesn’t Predict 401(k) Behavior

Posted on November 25, 2009 by Editor Test -

Asian workers in the U.S. have higher 401(k) participation and contribution rates than Whites, and Whites have higher rates than African-Americans or Hispanics, according to a new research brief from the Center for Retirement Research at Boston College.

But ethnicity did not predict 401(k) behavior when people with similar education, wealth, home ownership and retirement plan characteristics were compared, except in one respect: Asians still out-contributed Whites by 1.2 percentage points.

The study, “401(k) Plans and Race,” was based on an analysis of the Federal Reserve’s Survey of Consumer Finances. The study did not encompass data on savings rates by Asians in their countries of origin, which may have shown that they save at much higher average rates than Americans. In Taiwan, for instance, the household savings rate is about 28% of income.

With no controls for socio-economic factors, the SCF data showed that Asians are more likely to participate in 401(k) plans than Whites, and that Blacks and Hispanics are almost 8% less likely to participate than Whites. Blacks and Hispanics had lower contribution rates—0.5 and 1.0 percentage points, respectively—than Whites. Asians contributed at a rate that was 1.3 percentage points higher.

Asian workers, who represent only 3.9% of the U.S. non-self-employed workforce, were the most likely to be eligible to participate a 401(k) plan, had by far the highest participation rate (83.1% vs. 77.4% for Whites and just under 70% for African-Americans and Hispanics) and contributed more of their salary (7.8%) than the other groups (6.5% for Whites, 5.9% for blacks and 5.5% for Hispanics).

“The good news is that 401(k) participation and contribution decisions do not appear to vary by race/ethnicity . . . For comparably situated individuals, Blacks, Whites, and Hispanics respond in a similar fashion in terms of joining a 401(k) plan and deciding how much to contribute,” authors Alicia Munnell and Christopher Sullivan wrote.

“The bad news is that Blacks, Whites, and Hispanics are not similarly situated. Blacks and Hispanics are less likely than Whites to be eligible for an employer-sponsored plan, less likely to have characteristics that would lead them to participate, and less likely to have a taste for saving that would lead to high rates of contributions.

“So, the best way to boost retirement saving among minorities is not by thinking about race or ethnicity, but by focusing plan design and education efforts on those with lower levels of earnings and education,” the brief said.

Ally, Ally, InFRE

Posted on November 25, 2009 by Kerry Pechter -

If you’ve attended a retirement income conference anywhere in the continental United States recently, you’ve probably met Kevin S. Seibert, CFP, CEBS, CRC, managing director of the International Foundation for Retirement Education, or InFRE.

A tall, sandy-haired Midwesterner, the Barrington, Ill.-based Seibert logs many thousands of air miles each year, delivering slide presentations at retirement conferences and teaching workshops on retirement income to groups of financial advisors, often at banks and insurance companies.

You may even have heard Seibert describe his epiphany when he broke with the orthodoxy of conventional financial planning and realized that life annuities, by virtue of their mortality credits, can be an important source of retirement income.

If you’ve seen Seibert lately, you may also have heard him announce that the Certified Retirement Counselor designation, which InFRE confers, is now accredited by the National Commission for Certifying Agencies, after two years of work by Seibert and his colleague, Betty Meredith, CFA, CFP, CRC.

So-called “senior designations,” as you probably know, have become objects of controversy. Two years ago, a number of self-described “senior specialists” used flimsy credentials and free lunches to hustle retired investors. Several states began prosecuting them.

Regulations soon followed. The State of Massachusetts eventually banned the use of senior certificates except for those accredited by either the NCCA or the American National Standards Institute, two organizations that certify certifiers.

Financial advisors clearly benefit from having the right acronyms after their names. In the retirement income sphere, several certifying bodies are vying for advisors’ attention. To help advisors understand their options, RIJ has initiated an occasional series on organizations that offer certificates in the retirement space.

A few weeks ago, we reported on the Retirement Management Analyst designation, which is currently in development by the Boston-based Retirement Income Industry Association. This week we report on InFre’s Certified Retirement Counselor designation.

Non-partisan manual
Depending on how much you’ve already read about or know about retirement income, the topics that InFRE’s manuals cover and the skills that are assessed during the four-hour, 200-question CRC exams may either be familiar or entirely new.

InFRE’s 276-page, spiral-bound study guide, “Strategies for Managing Retirement Income,” written by Meredith and Seibert in partnership with NAVA (now the Insured Retirement Institute), presents a six-step process that covers all the basics—client assessment, management of retirement risks, income generation, etc.—in thorough and even-handed detail. It doesn’t push any particular philosophy, other than perhaps the assumption that retirement income planning is quite different from financial planning in mid-life.

“We took a lot of the information that’s already out there, we researched it thoroughly, and we used it to develop Strategies for Managing Retirement Income,” Seibert told RIJ. “That’s our main course of study, but it’s separate from CRC. It goes into more depth than the study guides for the CRC examination.”

The distinction between the educational materials that InFRE promotes and the CRC study guides or “Test Specifications” is an important one. To be NCCA-accredited, a certifying body must show that it isn’t merely using a designation as an excuse to sell textbooks or other paraphernalia. Nor does the NCCA accredit an organization that simply awards a framable “diploma” to people who have completed a specific course of study.

“A certification program isn’t based on the education, it’s based on knowledge,” said Jim Kendzel, executive director of the Institute for Credentialing Excellence, or ICE, of which the NCCA is the accrediting arm. “It’s always linked to an assessment tool, and it always involves a continuing education requirement.”

(The credentialing process presents a kind of infinite regression. InFRE is accredited by NCCA, which is part of ICE. ICE, in turn, is accredited by the American National Standards Institute, whose board consists of officers of major U.S. corporations, academics, and federal officials. ANSI represents the U.S. at the ISO, or International Organization for Standardization, which governs the ISO 9000 quality standards.)

InFRE met those requirements in September, after a two-year application process—and twelve years after the CRC was created. InFRE first developed the designation in 1997 in partnership with the Center for Financial Responsibility at Texas Tech University in Lubbock and with help from a federal grant. It has been certifying and re-certifying financial professionals since then.

“About 2,000 people are accredited or in the process of being accredited, and we’re hoping to go to 3,000 by end of 2010,” Seibert told RIJ. “About 60% to 70% are in financial services. Our growth slowed down last year, as anticipated, because state compliance departments were saying, ‘We’re not going to let you use your retirement designation until it’s accredited.’”

One of the first to receive the CRC from InFRE was Linda Laborde Deane, CFP, AIF (Accredited Investment Fiduciary) of Deane Retirement Strategies in New Orleans. Her son Keith, a 2008 University of Georgia graduate, is among the most recent to start the CRC process.

“The more credentialing you have, the more clients respect you and the more confidence they have in you,” she told RIJ. “It’s important that CRC has continuing education requirements because clients are aware of that—that is, if you make them aware of it.”

Deane sees no need for annuities for her retired clients, preferring to rely on prudent, adjustable systematic withdrawals for income. She advises her clients each year on how much they can afford to harvest from their accounts. Though not a market timer, she watches the markets closely. In July 2006 she eased back to a 50/50 balance of stocks and bonds, then stood pat. “My clients went through 2008 without any decrease in their income,” she said.

Annuity revelation
Seibert joined InFRE in 2003. A graduate of Miami University of Ohio with an MBA from the University of Wisconsin, he founded and operated Balance Financial Services, a Chicago financial planning and consulting in 1988. Earlier, he’d been a consultant at William M. Mercer Inc., specializing in employee benefits.

His financial life includes a conversion of sorts. “When you grow up in the fee-only CFP world, you’re taught to think that annuities are bad.” He had not considered the mortality pooling effect, however, which enhances the wealth of the surviving annuity owners.

“That was something of a revelation,” he said. “And you’re not just getting more income than you would otherwise. You’re preserving your managed assets as well by making sure that your basic needs will always be met. One of the cons of annuities is that they take away from your estate. But the opposite is true. If you live a long time, they can preserve your estate.”

You might notice that Seibert and Deane don’t hold identical views on the value of income annuities. But then, there’s nothing in the CRC designation that says they have to.

Health Care Spending as Share of After-Tax Income for Older Married Couples, 2000 and 2030

Posted on November 18, 2009 by Editor Test -

RMD and Dangerous? Not Really.

Posted on November 18, 2009 by Editor Test -

Underdogs inspire my respect. I’ve always admired, for example, the Required Minimum Distribution. How did the RMD become the pariah of the tax code, the wolf at every septuagenarian’s door?

Nothing so universally detested could be all bad, my contrarian instincts told me.

The RMD must surely suffer when people discuss Roth IRAs, just as cavemen suffer when they see GEICO commercials. Why does anyone convert a traditional IRA to a Roth IRA, except to avoid an RMD?

When someone first described the RMD to me, I was baffled. The U.S. government was apparently forcing senior citizens to move a fraction of their tax-deferred money to a taxable account, and to pay income tax on the amount they transferred.

It made no sense. Then someone explained it to me. The government wants its pound of flesh. In their youth, I was told, these poor retirees sold their souls for a paltry tax deduction, not realizing that the devil, in the shape of the IRS, would eventually claim . . . an RMD.

O.K., here’s where I’m going with this: We shouldn’t be thinking of the RMD as a pound of flesh. We should be thinking of it as an annuity.

In the United Kingdom, retirees have to convert their remaining tax-deferred savings (they get 25% of it tax-free at retirement) to an income annuity when they reach age 75. They don’t call it a penalty or a curse. They call it an annuity.

Americans and their advisors should think of the RMD the same way, and integrate it with their retirement income plans. The RMD schedule is designed to stretch tax-deferred savings over a lifetime—a long lifetime. You withdraw about 3.6% of your money the year after you reach age 70½. By age 78 you’re taking out about 5%. At age 83 you take out about 6%. If you make it to age 90, you’ll be taking out 10% a year.

Resentment toward the RMD is understandable. If someone doesn’t need the income, the RMD is simply an annual tax bill from Uncle Sam. One 82-year-old I know always mails his distribution to his adult kids, just to get the damned thing off his hands. It’s tainted money.

But if retirees need the income, as most of us will, the RMD is a healthy part of life. It’s money we can look forward to. If a retiree needs the RMD for living expenses, he or she probably isn’t paying a very high marginal rate of income tax on the distribution. No cause for resentment there.

If you don’t need the income, do the sportsman-like thing. Appreciate the value of the tax-deferral that you enjoyed for all those years and pay the income tax. If the distribution threatens to push you into a higher tax bracket, make a contribution to charity.

I don’t like taxes any more than you do. But the RMD isn’t a tax. It’s an annuity. It has a specific public policy purpose: to ensure that people use their tax-deferred savings for retirement income rather than as a bequest. Tax deferral would make no sense without it.

That’s why it’s not entirely accurate to say that 401(k) owners are up a creek without a paddle when it comes to converting their defined contribution accounts to lifetime income. There’s the RMD. Sure, it’s crude. But would you prefer the British approach? If we didn’t bash the RMD, maybe more people would contribute to their 401(k)s and IRAs.

Personally, what concerns me more than taxes or RMDs is the abuse of language. We kick language around. We disrespect it. Characterizing the RMD as a government clawback and not an annuity is a corruption of language. And a corruption of language is a corruption of thought. You might even say that language is an underdog. It’s one that inspires my utmost respect.

Merrill Lynch Has Answers for Roth IRA Questions

Posted on November 18, 2009 by Editor Test -

A new Merrill Lynch Wealth Management white paper offers a detailed discussion of the Roth IRA conversion option that becomes available January 1 to those with an adjusted gross income of more than $100,000, thanks to a clause in the Tax Increase Prevention and Reconciliation Act of 2005.

The document, which asserts that a Roth IRA conversion isn’t necessarily for everybody, makes several important points. Among them:

Part of the conversion may not be taxable. If you made nondeductible contributions to a traditional IRA, you won’t be liable for income taxes on that money when you convert it to a Roth IRA. You must aggregate all of your IRA assets, determine the pre-tax amount, and multiply it by your tax rate to determine the income tax due.

Delay half of your tax until April 2013. If you convert a traditional IRA to a Roth IRA in 2010, you can either recognize the converted assets as income in 2010, or you can recognize half the income in tax year 2011 and half in tax year 2012. That is, you can pay your tax on half the distribution as late as April 16, 2012 and the tax on the other half as late as April 15, 2013.

Can’t make up your mind? Change it. If you decide that you don’t want your Roth IRA, you can “recharacterize” it back to a traditional IRA and absolve yourself of the tax liability on the conversion.

Generally, the deadline for re-characterization is the due date for your tax return-April 15 of the year after the year of the conversion-but you can re-characterize until October 15 if you filed the original tax return on time. It’s even possible, according to the white paper, to convert the assets of a traditional IRA to several Roth IRAs and recharacterize only those that lose value.

You can convert a former employer’s 401(k) to a Roth IRA. Since you can convert an old 401(k) to a rollover IRA, you can also convert it to a Roth IRA. The same is true for an inherited 401(k) account, an old 403(b) account, a 457 plan, a profit-sharing or money purchase plan, SEP-IRAs and SAR SEP-IRAs. You can also convert SIMPLE IRAS that have existed for at least two years.

Merrill Lynch says it has furnished its financial advisors with a “customized analysis tool” so they can help their clients determine if a Roth IRA conversion is right for them, given their age, retirement income needs, expected tax bracket in retirement, existing taxable accounts, legacy aspirations, and so forth.

Out-of-Pocket Medical Costs in Retirement: Part II

Posted on November 18, 2009 by Editor Test -

Two weeks ago, RIJ reported that the Financial Research Corporation had described as a “myth” a 2006 estimate by the Employee Benefit Research Institute that the average 65-year-old couple would need about $300,000 in savings just for out-of-pocket medical care in retirement.

The report instantly provoked the ire of EBRI’s president, Dallas Salisbury, who said that calling EBRI’s numbers a myth was tantamount to calling them lies. EBRI researcher Paul Fronstin also noted that FRC’s own data actually supported EBRI’s conclusions.

Each of these responsible organizations has a legitimate point. The EBRI has solid evidence regarding the amount of savings a retiree will need to pay for the health insurance needed to supplement Medicare and to pay out-of-pocket health care costs over the average life expectancy.

If you factor in health care cost inflation, the amount of savings needed for maximum protection becomes a shocking number. In a report last summer, EBRI estimated that when today’s 55-year-olds retire in 10 years, the men would need between $114,000 and $634,000 to cover insurance and medical other costs in retirement.

For women, the estimates are even higher. The average 55-year-old woman will need $164,000 to $754,000 in savings to cover medical expenses during retirement. Each person’s spending would depend on individual experience and whether he or she wanted a 50%, 75% or 90% chance of covering all health care costs in retirement, the EBRI said.

And that’s not counting eye care, dental care, or the potential cost of nursing home care, which now averages about $69,000 a year.

But the FRC also had a point. You can calculate prices, but people won’t necessarily be able to pay them. The savings requirements for health care may be mythical in the sense that very few Americans are on track to save anywhere near those amounts, or to have a retirement income that can support that level of expenditure. And if they can’t save or spend that much, they won’t.

Hence the conclusion the EBRI projections are unrealizable and therefore “mythical.” The EBRI projections may show the average costs—but that doesn’t mean the average person can or will pay them. People who can’t afford to be fully insured won’t be. Many will presumably find a way to survive.

“We’re not trying to dispel the idea that health expenses will be an important factor, and even $4,500 is not an insignificant amount,” he said. “But the idea that you need three hundred grand for health care or you’re not going to make it isn’t necessarily true.”

There’s actually little difference of opinion among the research groups. They all see health care costs rising astronomically. And they all acknowledge to some degree that straight-line projections based on current trends might not be literally predictive, because neither the government nor most individuals will be able to pay that much.

Richard Johnson of the Urban Institute and Jon Skinner of Dartmouth College use words like “implausible” and “unsustainable” to describe the burden of health costs on retirees in two or three decades.

“Herb Stein, the chairman of Richard Nixon’s Council of Economic Advisors, used to say that ‘unsustainable growth paths are unsustainable.’ And so if you believe that, EBRI’s point is well put,” said Skinner, who in 2008 co-authored with Kathleen McGarry a research paper entitled, “Out-of-Pocket Medical Expenses and Retirement Security.”

“If you’re 55 and you’re looking ahead to age 75, and health care costs continue to rise by four percentage points per year higher than inflation, then there’s obviously a big expense coming your way,” he said. “It’s the private equivalent of what’s happening on the public level [with Medicare]. If health care costs rise 4% a year then the government will be underwater too.”

“If you accept the Congressional Budget Office projections of future budget deficits, then there’s nothing on the landscape that shows that the growth will stop. As for the EBRI’s number, it’s just a number. It’s illustrative. The basic point is that over the long term out-of-pocket spending for health care is going to be a lot of money.

“I interpret EBRI’s numbers to mean that you better start saving more or plan to reduce other forms of consumption. You can’t save for every contingency. The message is that you must prepare for it,” he said, adding that the Obama administration’s “health care reform won’t change much in the short term. It will be a decades-long process to reform the incentives in our [health care] system.”

In their paper, Skinner and McGarry wonder “whether these doomsday predictions are overblown,” given the shortage of surveys of actual retiree out-of-pocket health care spending.

Their study suggests two reasons why predictions are difficult to make. For one thing, “expenditures [are] skewed towards the very end of life, with more than one-third of the expenditures in the last year coming during the last month of life,” they point out.

Second, people tend to spend more when they have more to spend. “Wealth is more predictive of spending on out-of-pocket health care expenditures than the flow of income,” they write. People with more money can and do spend it on things like in-home elevators and other optional things that people with less money simply do without.

Another specialist in this area is Richard W. Johnson of the Urban Institute, who in October 2004 published a study with Rudolph G. Penner called “Will Health Care Costs Erode Retirement Security?” When asked about the EBRI’s figures, he said his estimates were somewhat lower.

“I get an estimate of more like $75,000 per person,” Johnson told RIJ, or $150,000 per couple. “That’s out-of-pocket health care spending from age 65 forward to death. That’s an average. The median would be lower. Some people will spend nothing because they’re on Medicaid.

“On the other hand, so many of the people who are fully insured are getting huge subsidies from their employers. Ten percent of the over-65 population will experience catastrophic costs, but the median person won’t necessarily spend much.

“Even though my numbers are not as high as EBRI’s, they underscore the need to control spending,” Johnson added. “If [health care spending] continues at its current rate it will bankrupt the government and a lot of families.

“I think you’ll find that once individual spending gets too high, people will just cut back. They will become more savvy consumers. They won’t get those extra tests. That will bring down spending to some extent. But the numbers highlight the fact that health care will be expensive. And even if you’re fortunate enough to have [employer-sponsored] retirement coverage or expect it in the future, you shouldn’t rely on it entirely because it might disappear.”

Out-of-pocket health care expenses in retirement will fall most heavily on people who are in the so-called second income quintile—the lower middle class—who earn too much to qualify for Medicaid. Johnson’s research showed that health care costs might consume half of their after-tax income. Hut he called that scenario “implausible” and wrote, “It is doubtful that society would tolerate this result.”

Dubya’s Lingering Gift

Posted on November 18, 2009 by Kerry Pechter -

One of the holiday gifts that the 43rd president left behind for upscale taxpayers this year is the clause in his Tax Increase Prevention and Reconciliation Act of 2005 that removes the income limit on Roth IRA conversions.

Starting on January 1, 2010, even those who earn more than $100,000 a year can empty a traditional deductible IRA, pay income tax on the distribution, and call it a Roth IRA. After a five-year wait, all distributions from the Roth will be tax-free.

The arrival of this tax-saving measure is well timed. Many people expect the government to raise income tax rates to defray the debt created by two wars, the Wall Street bailout and the stimulus package. A Roth conversion would let traditional IRA owners settle all their tax obligations at today’s rates.

Nobody really knows how the tax rates might change. Financial advisors told RIJ they regard the conversion as a chance for high-earning clients to increase their after-tax incomes in retirement or to transfer IRA money—including IRA money rolled over from a 401(k)—money to their children tax-free.

But, even though they have a one-time chance to spread taxes on the conversion over 2010 and 2011 (and as late as October 15, 2012, with extensions) advisors aren’t rushing their clients into Roths. A National Underwriter survey last August showed, in fact, an underwhelming interest in conversions.

More than one tax basket
“In the short run, it seems fairly clear that taxes are going up,” said Russell Wild, a fee-only financial planner in Allentown, Pa. “I think the conversion is something everyone should look at. It should be particularly helpful to those already retired, who don’t currently have any money in a Roth.”

But he doesn’t recommend it to everyone. “It depends on the circumstance,” Wild said. “I’m getting calls from people who want to convert who are still working, and in a high tax bracket today. So even if taxes go up they might still be in a lower tax bracket in retirement.”

Wild believes in not having all your savings in any particular tax basket. “In any given year it’s optimal that you have a taxable and non-taxable basket, so that you can take from the taxable basket only to the point where you leave the 25% bracket,” he said.

For Antoine Orr, a fee-based advisor in Greenbelt, Md., and author of the new personal finance book, “In the Huddle,” a Roth conversion might be an opportunity for investors to correct the mistake of putting too much money in tax-deferred accounts to begin with.

Orr has been recommending for years that people shouldn’t only put enough money into a 401(k) to maximize the employer match. “We don’t know what tax rates will be down the road. You might be putting money in when taxes are lower. I’ve been saying that for 15 years, and people are now beginning to listen.”

Antoine Orr Unlike many advisors, he also recommends drawing down tax-deferred money before taxable money in retirement. While the money in tax-deferred accounts may be compounding, he said, “The taxes are compounding too. The concept comes from Don Blanton’s Moneytrax.”

Orr and Wild both noted that it makes little sense to convert a traditional IRA to a Roth IRA unless you pay the tax bill with money from a separate after-tax account. Otherwise you’ll simply reduce the balance in the Roth and undermine the purpose of the conversion. You might also owe taxes and a penalty on the distribution.

Segmented wisdom
“Whether Roths make sense depends heavily on individual situations, particularly for retirees or near-retirees,” said Elvin Turner, managing director of Hartford-based Turner Consulting, which counsels financial services companies. “This is an issue that is begging to have a financial plan around it. It is only in the context of a full plan that I believe people get to a correct decision on these types of opportunities.

“Again, this is heavily dependent on individual situations or at least on the situations of groups of people in similar segments. For retirees, the situations of retirement will be so different—working in retirement, semi-work, leisure, all of the above—that statements of conventional wisdom that purport to apply broadly will be way off of the mark.

“For example, the decision about whether to spend tax deferred dollars now or later depends heavily on whether you plan to work in retirement. The traditional models assumed little or no work related income in retirement. For retirees, what we are really seeing is the death of “conventional wisdom” and the rise of “segmented wisdom”—where strategies make sense for one or more segments, but never across the board.”

Do advisors think that taxes are going up? Yes and no. Cliff Draughn, president of Excelsia Investment Advisors, a Savannah, Ga., firm that manages money for those with about $4.5 million, has no doubt that taxes are going up. “They’re going to let the Bush tax cuts expire. That’s step one,” he told RIJ. “There’s the cap and trade legislation, which is really a carbon tax. That will hit every individual out there.

“There’s mandatory participation in health care, which could be interpreted as a tax,” Draughn added. “I think they’re going to raise the capital gains tax to 25%, and the 15% tax on dividends will be gone. Dividends will be taxed as ordinary income. The taxability of foreign income is something else that Obama has been talking about.”

“The average citizen just doesn’t understand economics. There are now more people receiving government benefits than there are people paying into the system. It won’t just be the rich who will be affected by the tax increases. It will affect the person earning $40,000,” Draughn said.

Wild is fairly sure that taxes will go up, he’s not sure which ones. “Yes, given the deficit and national debt, it’s mostly likely that income taxes will go up. But that shouldn’t be seen as a must-happen… Government may address the debt in other ways, such as a levying a VAT [valued-added tax]. And while it’s safe to assume that the rates for the most affluent will go up, it doesn’t necessarily mean your taxes will go up.”

Orr says clients expect him to be a tax soothsayer, even though he’s not. “I’m always asked, ‘What will the Chinese do?’ I say, ‘Even if I were in the President’s cabinet, I still wouldn’t now.’ I do know that we’re in world of hurt. It will take some time. It will fall on future generations to pay all this back.”

Note: After-tax contributions to a Roth IRA can be withdrawn from the account penalty-free and tax-free at any time. Earnings on contributions to a Roth IRA cannot be withdrawn penalty-free until the account has been open for five years and the account owner is age 59½ or older.

Sales of Indexed Annuities Cool in Third Quarter

Posted on November 18, 2009 by Editor Test -

Sales of indexed annuities reached $7.5 billion in the third quarter of 2009, up 11.3% from the same period last year but down 9.9% from the second quarter of 2009, according to the 45 indexed annuity issuers that participated in the 49^th Advantage Index Sales & Market Report.

“Sales are always going to decline when coming off of a record quarter,” said Sheryl J. Moore, President and CEO of AnnuitySpecs.com. “The big story this quarter is the shake-up in rankings among the indexed annuity carriers. While some companies’ sales are up more than 75%, others’ sales are down almost 60%.”

Allianz Life captured the top sales spot for the first time since the fourth quarter of 2007, and its MasterDex X is again the top selling product in the category. American Equity rose to second place followed Lincoln National, Jackson National and Aviva. The share of sales through the bank channel has tripled in the past year, and now accounts for 12.3% of overall indexed annuity sales.

For indexed life sales, 33 carriers in the market participated in the Advantage Index Sales & Market Report, representing 100% of production. Second quarter sales fell 1.3%, to $130.8 million, from the previous quarter but rose 0.9% from the same period in 2008.

Aviva led all companies in sales, with a 20% market share. Pacific Life’s Indexed Accumulator III was the top-selling product for the fourth quarter in a row. Nearly 60% of sales were of products using an annual point-to-point crediting method, and nearly half of sales were of 9 to 10 year contracts.

Reputation of ‘Alternatives’ Survives the Crash

Posted on November 18, 2009 by Editor Test -

“Institutions and advisors continue to view alternative investments optimistically, despite their questionable performance, correlation, and liquidity during last year’s global downturn as well as the high-profile scandals that rocked the hedge fund industry.”

So said Steve Deutsch, a database director at Morningstar, Inc., in a release about the second annual survey by his company and Barron’s of the way institutions and advisors view alternate investments such as hedge funds, real estate investment trusts, and absolute return funds.

“Institutions and advisors want the benefits of alternative strategies with the positive characteristics of traditional investments-low correlation with liquidity, absolute returns with transparency, and redemptions without restrictions,” Deutsch added. The survey found:

More than 60% of institutions and advisors believe alternatives will at least equal traditional investments in importance over the next five years.
Most of those surveyed expect 10% of their portfolios to be in alternatives over the next five years; one in four institutions expects alternatives to account for more than 25% of their portfolios.
Institutions and advisors expect to increase allocations to hedge funds over the next five years, as they have over the last five years.
Portfolio diversification, absolute returns, and exposure to different investment techniques, like arbitrage or shorting, were the top three reasons for investing in alternatives, as they were in last year’s poll.
Lack of liquidity and transparency were a bigger concern this year than last.

Fewer institutions and advisors view real estate investment trusts (REITs) and commodities as alternative asset classes today than in 2008, the survey showed. Those polled tend to classify investments as “alternative” based on strategy, i.e. absolute return, rather than designation, i.e. mutual fund versus hedge fund.

Morningstar and Barron’s conducted the Web-based survey in late September through early October 2009; 89 institutions and 300 financial advisors participated. Additional results, including charts for 2009 Alternative Investment Survey of Institutions and Financial Advisors can be viewed online.

Three Liquidity Options in New SPIA from Security Mutual Life

Posted on November 18, 2009 by Editor Test -

Security Mutual Life of New York, a 123-year-old insurer with an A rating from A.M. Best, has launched a new immediate annuity contract that allows the annuitant to receive unscheduled lump sum payments.

The retiree does not have to demonstrate a hardship or otherwise provide any reason to Security Mutual for his or her exercising any of three liquidity options:

Partial withdrawals are available as of the fifth, tenth, and 15th contract anniversaries.
Owners of term-certain annuities can withdraw the present value of the remaining term-certain payments.
The owner may at least once during the lifetime of the contract accelerate up to 50% of annuity income payments due in the next 12 months.

The product is currently available in the states of: GA, LA, MA, MD, ME, MS, NC, NH, NY, OH, PA, RI, SC, TX, VA, VT, WV. Applications in other states are pending.

Income-Oriented Advisors Seek Validation: Survey

Posted on November 18, 2009 by Editor Test -

Investment advisors have recovered some of the confidence they divested last winter, but they’d like a chance to either validate or adjust their own income-generation methods by comparing them with the best practices of their peers.

That’s one of the findings of “Update: Advisor Best Practices in Retirement Income, Q4 2009,” the third in a series of surveys of investment advisors in a variety of distribution channels by Practical Perspectives, a Boxford, Mass., research firm and GDC Research of Sherborn, Mass.

“Advisors are not sure if their system of providing retirement income is broken or not, but they are open to looking at best practices. They aren’t getting the benchmarking they need,” said Howard Schneider, president of Practical Perspectives, who co-authored the 54-page report with Dennis Gallant, president of GDC.

The study supplements the authors’ two previous advisor studies, a third-quarter 2008 survey called “Advisor Best Practices: Delivering Retirement Income and Transition Support” and a second-quarter 2009 survey called “Examining Best Practices in Retirement Income Portfolios: How Advisors Support Retirement Income Clients.” The report is for sale by the authors.

About 47% of the advisors polled have 40% or more of their clients near or in retirement. Many already use a variation of the “bucket” method, which assigns different accounts or portfolio segments to different stages of retirement or different purposes in retirement.

These advisors, who indicate greater confidence in their methods, are often independent advisors who use the “team approach”-that is, they collaborate with accountants, attorneys, and other specialists in serving their clients, Gallant and Schneider told RIJ.

In their summary, the authors say, “The market now seems divided among total return, pooled [buckets] and income floor practitioners with none of these approaches appearing to dominate . . . One element of portfolio construction that is gaining greater traction is the need to create a safety net to meet minimum income needs for essential day-to-day living expenses. This change underscores the growing distinction between income needs and income wants . . . Product providers looking to expand support to this growing market need to understand that a one-size-fits-all approach will likely gain little traction.”

Of the advisors surveyed by Schneider and Gallant, 36% were independents, 27% were registered investment advisors (RIAs), 15% were wirehouse advisors, and six percent were in insurance companies. The bank and regional broker-dealer channels had five percent each.

Fidelity Outsources GWB Production to MetLife

Posted on November 18, 2009 by Editor Test -

Fidelity Investments has replaced its successful Fidelity Growth and Guaranteed Income variable annuity with a new contract that’s similar in name, less risky to the company, more expensive for investors and has a different underwriter: MetLife.

FGGI was “one of the most successful product launches Fidelity has ever had,” said Joan Bloom, senior vice president at Fidelity Investments. But after the financial crisis its living benefit guarantees became too expensive for FILI, Fidelity’s relatively small captive life insurer, to keep underwriting.

“We sold about $1.5 billion in 16 months” with FGGI, Bloom said. “But this was about volatility and the cost of hedging, and FILI doesn’t have the same capability that MetLife has on the insurance side.” MGGI got a million dollar contract on its first day, she said.

Now called MetLife Growth and Guaranteed Income, the product will be sold exclusively through Fidelity, which markets no-load mutual funds and other financial products and services directly to investors. Fidelity also sells MetLife fixed annuities and single-premium immediate annuities.

In both the new and the prior product, investors are limited to one investment choice. The new product offers the Fidelity VIP Funds Manager 60% Fund, which holds 60% equities, 35% bonds and five percent cash. The old product offered a Fidelity VIP Balanced Fund. “It’s exactly the same investment,” Bloom said.

In both contracts, there was a flat two percent surrender charge during the first five contract years and step-ups of the income base to the account value, if higher, on each contract anniversary until age 85. The new product has a return-of-premium death benefit while the ultra-slim FGGI version did not.

The MetLife edition of the product is more expensive than its predecessor. With a $50,000 initial minimum premium, it has an M&E of 1.90% for single life and 2.05% for joint coverage, and current fund fees of 84 basis points. The FILI contract, which required a $25,000 initial premium, charged a single all-inclusive price of only 1.10% for single owners and 1.25% for joint owners.

“Even at that price [274 to 289 basis points], it still provides value to the customer,” Bloom said, given the historic returns of the product’s 60-35-5 investment allocation. “And it’s among the lowest-priced living benefit products on the market.”

While the original FILI product offered a flat five percent payout from the guaranteed income base, the MetLife version offers three age bands. It pays out four percent of the base for those ages 59½ to 64, five percent to those ages 65 to 75, and six percent to those who delay guaranteed income to age 76 or later.

People approaching or living in retirement can use a portion of their 401(k), 403(b), IRAor any other savings, to purchase guaranteed lifetime income for an individual or for his or her spouse with MGGI. A MetLife/Harris Interactive poll conducted in September 2009 showed that since the economic downturn, 68% of Americans value portfolio protection against market losses more than stock market gains.

Among older baby boomers (ages 55-65) this conservatism is acute, with 16% in the MetLife poll saying that they are “more focused on having reliable monthly income versus focusing solely on the size of their nest egg.”

Old-Age Poverty Higher in U.S. Than Most Developed Countries

Posted on November 11, 2009 by Editor Test -

In a report published earlier this year, the Paris-based Organization for Economic Co-operation and Development said that nearly one-fourth (24%) of over-65-year-olds in the United States have incomes lower than half the country’s median household income (the OECD definition of poverty).

The high risk of old-age poverty in the United States is mainly due to the relatively low level of the Social Security safety net, which provides the average U.S. retiree with an income that’s only 18% of average earnings, the 279-page report said. Only Hungary has a lower value at 16%, while the OECD average is 27%.

The financial crisis hurt all of the 30 developed countries that belong to the OECD. Collectively, private pension funds in those countries, which include all of the major Western nations plus the Pacific Rim nations of Japan, Korea, Australia and New Zealand, lost US$5.4 trillion in value in 2008.

The pension fund losses were highest within the United States, mainly because U.S. pension funds had about 59% of their assets in equities when the crisis hit, compared with an average of 36% in equities in the 20 OECD countries where data are available.

In the United States, private pensions and other investments provide 44% of retirement incomes, which is 24 percentage points more than the OECD average of 20%. Comparable figures are found in Canada (at 41.0%) and Ireland (at 42.9%).

The report, “Pensions at a Glance 2009: Retirement Income Systems in OECD Countries,” can be obtained from the OECD.

With Stocks, the “Enemy Is Us”

Posted on November 11, 2009 by Editor Test -

In a provocative new series of Issue Briefs, the Center for Retirement Research at Boston College will examine whether stocks are suitable as long-term investments for savers. In doing so, the Center is challenging the conventional wisdom that stocks are the best long-term investment, not just for young investors but even for those who have recently retired.

The first brief, by economists Richard W. Kopcke and Dan Muldoon, asserts that “variations in business activity and profits account for a relatively small share of the risk in stocks over holding periods as long as 10 years. Instead, variations in shareholders’ valuation of earnings account for most of the volatility of returns.”

The brief, entitled “Why Are Stocks So Risky?” also says that 10 years may not be an adequate time horizon for investing in stocks, contrary to popular belief.

“The risk attributed to valuations of earnings tends to diminish over investment horizons as long as 40 years or more, because the value of stocks broadly follows the trend in GDP and corporate profits,” the authors said. “Although stocks are better investments for the very long run, these periods can seem too long to suit savers who lack the capacity or the willingness to absorb significant financial risks in the interim.”

In a section entitled “We have met the enemy and it is us”—a reference to a 1971 comment by the opossum Pogo from Walt Kelly’s comic strip of the same name—the authors suggest what John Maynard Keynes is said to have believed: that investor behavior rather than corporate fundamentals cause most of the stock market’s ups and downs.

“Shareholders’ reactions to economic conditions and to recent trends in stock prices create most of the volatility in the returns on equity,” they said. “Although stock prices vary substantially in response to cycles in business activity and earnings, these factors account for a small share of the risk in stocks over holding periods as long as 10 years or more.”

With New Accounting Standard, AIG Remains Profitable

Posted on November 11, 2009 by Editor Test -

American International Group earned $455 million in the third quarter of 2009, its second period in the black, but management expects continued earnings volatility, National Underwriter reported.

The $455 million profit compared with a loss of $24.5 billion for the same period in 2008. For the first nine months of 2009, AIG said it lost $2.08 billion, compared with a $37.6 billion loss for the same period in 2008. Life insurance and retirement services operating income was $2.2 billion in the third quarter, up from $1 billion a year earlier.

The U.S. government has owned a 79.9% interest in AIG since last fall’s bailout. For the second quarter in a row, AIG officers did not hold a public teleconference to discuss earnings.

In addition to improved market performance and mutual fund income, AIG gained from “the new investment impairment accounting standard adopted in the second quarter of 2009,” which drove a reduction in net realized capital losses, said Robert H. Benmosche, AIG’s chief executive officer.

But these gains “were offset by impairments in the asset management segment, higher current accident-year losses related to credit crisis exposures and prior accident-year losses in general insurance and lower income from life insurance and retirement services investment-linked and annuity products globally,” he said.

Concerning its government debt, AIG said its total balance outstanding from a Federal Reserve Bank of New York facility is $41 billion, including $35.8 billion of net borrowings and $5.2 billion of accrued compounding interest and fees, with availability of $24.2 billion. Interest and fees accrued have been charged against AIG’s earnings.

The company said as of Sept. 30, it had drawn down $3.2 billion, including $2.1 billion from $29.8 billion available under a Series F Preferred Stock Department of the Treasury Commitment. AIG’s total balance outstanding from the Fed Commercial Paper Funding Facility was listed at $9.6 billion among AIG Funding, Inc., Curzon Finance LLC and Nightingale Finance LLC.

Asset sales to repay the government, AIG said, are expected to generate $5.6 billion after taxes and talks are underway with potential buyers of other businesses.

Prudential To Launch TV Ad Campaign

Posted on November 11, 2009 by Editor Test -

Prudential Financial launched its “Morse Code SOS” television advertising campaign on Oct. 25, to run through 2010. The campaign kicked off Oct. 18 with a full-page ad in the New York Times and also includes Internet ads, billboards at airports, elevator advertisements and an electronic billboard in Times Square.

The new Prudential television ads will show buildings in large cities lighting up in Morse code sequences, representing organizations sending out a call, or SOS, for better solutions for asset management, secure retirement guidance and benefits for employees.

In other news, Prudential executives said in a conference call that gross variable annuity sales for the quarter reached a record $5.8 billion, compared to $2.5 billion a year ago. Net variable annuity sales were $4.4 billion in the third quarter.

In a transcript of the call, the executives noted that all of the company’s variable annuity living benefit options and about 60% of all of the firm’s variable annuity account values that are protected by income guarantees are subject to an “auto rebalancing feature.”

With this feature, customer funds are automatically reallocated to fixed income investments during market declines, thereby limiting the decline in the account values and protecting the company’s ability to support the contracts’ income guarantees. When the market rises, money returns to each client’s investment choices. The process is entirely automated.

“With about 85% of our current quarter variable annuity sales including the HD living benefits we are continuing to migrate our book of business toward auto rebalancing products. With the improving financial markets, about $5.5 billion dollars of account values that had been rebalanced to fixed income investments during the market downturn returned to client selected investments over the past two quarters,” the firm said.

In August, Prudential introduced a new variable annuity living benefit product feature called HD 6 plus, which offers a 6% annual roll up for protected value rather than the previous product’s 7%.

While “it’s reasonable to assume that a portion of our third quarter sales reflected purchases of the earlier product in anticipation of the introduction of the new one, HD 6 plus continues to offer the differentiated value proposition that has driven our success in the marketplace. And initial indications are that it is being well received by clients and their advisors,” the earnings call transcript said.

Taiwan’s Population Growth Trends, 1952-2006

Posted on November 11, 2009 by Editor Test -

Taiwan’s Population Growth Trends, 1952-2006
Year	Total Population (000)	Birth Rate (%)
1952	8,128	4.66
1955	9,078	4.53
1960	10,792	3.95
1965	12,628	3.27
1970	14,676	2.72
1975	16,150	2.30
1980	17,850	2.34
1985	19,258	1.80
1990	20,353	1.66
1995	21,471	1.55
2000	22,216	1.38
2005	22,690	0.91
2006	22,790	0.90
Source: Accounting Office, Taiwan Statistical Data Book, 2007: 24-25

RIJ Reaches a Milestone

Posted on November 11, 2009 by Editor Test -

Back in June 2009 I noted in this column that Retirement Income Journal would become available only to paid subscribers at some future date. Well, the future is now.

Starting with our next issue, we’ll be offering RIJ to individual subscribers for $149 a year—an intentionally low price that suits the times we live in. Group subscriptions will be available at a graduated cost, based on the number of subscribers in each group.

As a subscriber, you’ll continue get what no other print or online publication delivers—timely news and original analysis of the retirement income industry. As editor and principal writer of RIJ, I plow through the pertinent literature, trek to as many conferences as I can, and talk to the players every day. Then I publish what I believe will interest you.

It’s never easy to charge for what used to be given away. But readers tell us that RIJ is worth paying for. We’re the only “honest broker” for information in this industry, they’ve said. We’re the only publication that consistently “puts the news in perspective.”

The past six months have been exciting. But the year ahead will be more so. We’ll broaden and deepen our coverage of the retirement industry—a fast-growing sphere that embraces elements of the securities industry, the insurance industry, the academic world, and government. We’ll drill deeper into the issues that matter to advisors, to financial services industry executives, and to those in the 401(k) world. Over time, we’ll evolve into a multidimensional portal with databases, discussion groups and archives.

In 2010, the retirement industry will face a number of important questions. How will health care reform change the game? Will we see higher taxes and inflation? What’s the future of compensation for advisors and producers? Do products like in-plan income options for 401(k) participants or annuity/LTCI hybrids have legs?

There’s a lot of ground to cover, but we’re committed to covering it. Retirement Income Journal will follow the Boomer retirement trend wherever it leads, and to forecast, as best we can, where it’s headed next. We invite you to join us.

House Passes Historic Health Reform Bill

Posted on November 11, 2009 by Editor Test -

In a vote last Saturday night, the House of Representatives approved H.R. 3962, a bill that would extend health care coverage to all Americans at an estimated cost of $1.1 trillion over 10 years, according to various press reports.

Democrats voted 219 to 39 in favor of the bill while Republicans voted 176 to one against it. The measure would provide health insurance to tens of millions of uninsured. It authorized $2 billion for a subsidized public health care insurance program: the controversial “public option.”

The expansion of coverage will be financed by a projected $440 billion reduction in Medicare spending over ten years, as well as new fees and taxes, including a 5.4% tax “of so much of the modified adjusted gross income of the taxpayer as exceeds” $1 million for those filing joint returns or $500,000 for single filers. That tax would affect about one percent of America’s 114.5 million households, which receive about 18% of earned income.

The bill would also levy a 2.5% tax on “the first taxable sale” of a medical device, would tie reimbursements to nursing homes to the quality of care provided, and would calculate reimbursements under Medicare Advantage plans on a regional rather than a county-by-county basis.

In terms of reforming the health insurance practices, the bill would require health insurers not to reject people with pre-existing medical conditions, to refrain from “dumping” of high-risk individuals from group plans, and require insurers to pay out at least 85% of their premiums in benefits.

The legislation would also eliminate lifetime limits on coverage, would require insurance companies to cover dependent young adults up to age 27, and would stop companies from eliminating medical benefits for retirees when they do not eliminate them for active employees.

Under the bill, the Secretary of Health and Human Services will establish a $10 billion “temporary reinsurance program” to reimburse participating employment-based plans for up to 80% of claims of $15,000 to $90,000 from retirees over age 55 but not yet eligible for Medicaid and to their spouses, surviving spouses and dependents.

The bill would likely not have passed the House had anti-abortion Democrats not been able to tighten restrictions on coverage for abortions under any insurance plan that receives federal money.

Health care reform still faces a tough test in the Senate, where passage requires more than a simple majority—at least 60 votes to assure passage—and where the two-senator-per-state rule gives conservative, sparsely-populated states in the South and West relatively more control over the legislative process. In the House, liberal, densely populated urban areas wield more voting power.

Because a national health insurance program would be unsustainable if young, healthy people opted not to participate, the House legislation requires most Americans to obtain health insurance or face penalties. Most employers would have to provide coverage or pay a tax penalty of up to 8% of their payroll.

The bill would expand Medicaid and offer subsidies to help moderate-income people buy insurance from private companies or from the public option. It would also set up a national insurance exchange where people could shop for coverage at competitive rates.

In the past, low-income Americans have had access to health care through public hospitals. These have mainly been teaching hospitals linked to universities in major cities. Overwhelmed by demand from rising numbers of uninsured Americans, however, public hospitals have closed at a high rate during the past decade, according to Web sources.

Estimating Out-of-Pocket Health Care Costs in Retirement

Posted on November 10, 2009 by Kerry Pechter -

Even if President Obama signs a health care bill this year, retired and soon-to-retire Americans still face plenty of uncertainty regarding their own physical health and their ability to cover all their out-of-pocket medical expenses in retirement.

Indeed, the risk of “unexpected health care needs and costs” always ranks near the top when Americans are surveyed about which retirement risks—longevity risk, inflation risk, stock market risk, and so forth—concern them most.

Unpredictability is part of what makes health-related risk so troubling. “Health care costs are very skewed,” said Anna Rappaport, a Chicago-based consulting actuary who studies retirement risks. “Each year, about 63% of all health care spending is accounted for by the 10% of the population that spends the most.” But no one knows if he or she will be among that 10%.

The fact that health care costs continue to rise faster than the overall rate of inflation also makes them unpredictable and hard for retirees to budget for. According to the Urban Institute, by 2030 even high-income retired couples will be spending twice as big a share of their disposable income on health care as they did in 2000.

And there’s the ever-present concern that a retiree might suffer a catastrophic illness or injury that overwhelms his or her health coverage. “Even if you have insurance, there might be maximum coverage limit of $1 million. Or the insurer might pay only $300,000 for cancer treatment that the hospital says costs $500,000,” Rappaport said.

Over the months ahead, Retirement Income Journal will publish a series of articles on the financial and non-financial risks that retired Americans face. We’ll examine the risks themselves, as well as the recommended ways to mitigate them. In light of last week’s passage of the “Affordable Health Care for America Act,” we’re starting the series with a look at health care cost risk.

Expect to Pay $200,000 to $300,000
Several groups have tried to estimate what the typical retiree’s out-of-pocket costs would be. If you limit costs to what a 65-year-old retired couple might pay for Medicare co-pays and deductibles and premiums for supplemental private insurance, the best estimates are between $200,000 and $300,000.

At the lower end, the Center of Retirement Research at Boston College has estimated that the average 65-year-old couple retiring today might spend $206,000 on health care in retirement. But for those retiring in 2020, the estimate jumps to $284,000. In 2008, Fidelity Investments suggested that health care costs could average $225,000 per couple. Richard Johnson, a researcher at the Urban Institute, told RIJ that the typical expenditure might be as low as $150,000 for many couples.

Estimates by the Employee Benefit Research Institute tend to be higher. Using Monte Carlo methodology, EBRI projected the amount of assets needed to cover health care costs in retirement 50%, 75%, and 90% of the time. The cost estimates varied between $194,000 and $635,000, on average, depending on the risk assumed and the level of prescription drug use.

These are averages, of course. The premiums for Medicare Advantage plans or for employer-sponsored retiree health benefits—which are increasingly rare—can vary widely from one part of the U.S. to another and from one company to another. Also, the costs of nursing home care or long-term care insurance do not figure in these estimates.

Practical steps
There are a number of preventive measures you and your clients can take to minimize or mitigate health care cost risks. They include:

Make room in your retirement budget for health care. When projecting annual living expenses in retirement, it will help to anticipate spending about $10,000 per year per couple on health insurance premiums, co-pays, deductibles and medications, even when Medicare coverage is in place. Adjust your savings rate accordingly. In the years when you spend less, think about putting that money back into savings.

Mind the gap between retirement and eligibility for Medicare. People who retire before age 65 but don’t buy private medical insurance run the risk of incurring huge medical costs if they become seriously ill. To eliminate this risk, don’t retire until age 65 or buy private insurance.

Supplement Medicare with a layer of private insurance. Of the respondents to the Society of Actuaries 2007 Risks and Process of Retirement Survey, 61% of retirees said they purchased supplemental health insurance or participate in an employer’s health plan and 14% planned to do so. The premiums will add to your out-of-pocket costs, but the coverage may save you money in the long run.

Buy long-term care insurance. Although long-term care cost risk is a separate retirement risk that we’ll discuss in a future story, it’s worth mentioning here. Nursing home costs can dwarf all other health care costs in retirement. For wealthy families with large amounts of legacy assets to protect, the cost of long-term care insurance may be relatively trivial. Depending on their risk preference, they may prefer to buy insurance even if they can afford to self-insure.

Become a smarter health care consumer. If medical costs continue to climb at their current rate, they will eventually claim an unsupportable share of retirement income. When that happens, retirees will need to economize. “You’ll find that once individual spending gets too high, people will just cut back. They will become more savvy consumers. They won’t get those extra tests. That will bring down spending to some extent,” said Richard Johnson.

Live a healthy lifestyle. You can minimize health costs by preventing illness through exercise and proper nutrition. But this is easier said than done. In a Society of Actuaries poll, 75% of retirees said they do this and 23% said they plan to, but the SOA pointed out that “these high percentages may be more indicative of wishful thinking than tangible action.”

Bottom line
The research suggests that the average retired couple will need to spend at least $200,000 over the course of retirement—assuming both spouses live to their life expectancies or longer—to cover Medicare deductibles and co-pays and premiums for private or employer-sponsored supplemental coverage.

One’s ability to handle these expenses depends on one’s income, of course. A retiree with an income of $120,000 can afford to pay $10,000 a year on health insurance and prescription drugs. But the same $10,000 would represent a much larger burden for the millions of retirees with incomes of $40,000 to $50,000.

Out-of-pocket health care spending as a percentage of after-tax income is expected to grow in the years ahead. In 2030, according to the Urban Institute, the poorest retired couples could spend more than 50% of their income on health care. Even the highest earners are expected to spend about 16% of income on health care two decades from now, up from less than 10% in 2000.

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