David Giertz is a financial industry professional and a Certified Financial Planner who has spent his entire career helping Americans ensure that they will be in a comfortable position to retire. As a top executive with Nationwide Financial, he helped that company expand its portfolio of retirement-related products, including annuities, life insurance, retirement plans, mutual funds and many other offerings. Prior to his executive role, he had worked for Nationwide for over a decade, adding to his already immense experience in the industry. Today, Giertz is widely considered one of the nation’s foremost experts on retirement planning.
When is the right time to retire?
Although the vast majority of Americans say that they intend to step back from the workforce at some point, the question of when one should retire can turn out to be surprisingly more complex than might be imagined. Of course, it is imperative to have enough savings to ensure an adequate income stream in retirement. But Giertz points out that there are other considerations beyond income that affect when someone should retire as well.
One of the most serious issues that new retirees face but give little prior thought to is the simple fact that they will suddenly have nothing to fill their time with. Even those who do not especially perceive their jobs to be enjoyable often derive far more meaning from their social interactions at work than they might realize. And many studies have shown that people who become socially isolated experience negative health outcomes at far higher rates than those who have a strong social support network.
This means that one of the most important things in making retirement work can be ensuring that you can stay socially active and are able to fill your days with meaningful activities. This can make early retirement, especially for those in their 50s and 60s who are still in prime mental and physical condition, much less attractive over the long-term than some people may initially realize.
But the most important hard reality of retirement is that you’ll need sufficient income to make it work. There are a number of ways to ensure that you can count on having enough money to maintain your lifestyle. Unfortunately, the majority of Americans are currently severely underfunded for retirement. This means that they either need to start aggressively saving, or they will ultimately find themselves relying on a Social Security system that, in all likelihood, will begin slashing benefits by the year 2033. For this reason, it is more important than at any time in the past 75 years for Americans to begin saving money early and to follow conservative investment strategies so that they’ll be nearly guaranteed to have enough money to last them through their golden years.
The risks and rewards of annuities
Annuities sometime get a bad rap because they sometimes have high commissions and fees attached to their sale. However, a fixed annuity can be a great investment for someone who needs a minimum amount of guaranteed income over a long period of time. Annuities also have less risk attached than other so-called low-risk investments, like bonds. Whereas a bond can lose a great deal of value when interest rates rise, annuities will typically be indexed to the prevailing rates that a company is paying out. This means that there is no risk of extremely high interest rates, like those in the 1980s, wiping out a huge portion of the investment’s real value.
David Giertz underscores that the current ultra-low interest rates are almost guaranteed to rise in the future. And there is a strong chance that they could rise by historic margins over the course of the next 10 years. For this reason, David Giertz strongly recommends that people saving for retirement not put too much of their retirement capital in the current bond market as there is far higher-than-normal risk of experiencing substantial losses in this market even though it has historically been considered extremely safe.
Giertz says that, although annuities can provide a great value for future retirees, there are a few things that annuity shoppers should watch out for. The first thing is that fixed annuities are generally more desirable than variable annuities for purposes of retirement since they guarantee a minimum stream of income that is not subject to market risk. The second thing to pay attention to is that some annuities have extremely high commissions and other fees attached.
This means that it is often better to buy an annuity product directly from a reputable insurance company rather than from a financial advisor. If you are considering purchasing an annuity from your adviser, Giertz says that it is best to ask if they are bound to the fiduciary standard. If they say they are not or refuse to answer, Giertz says that there is a strong likelihood that the annuity has high commissions attached.
Drawing down on savings
Giertz advises clients that one of the best ways to finance retirement is also one of the simplest. Drawing down existing retirement savings can provide an adequate stream of revenues. This also allows the saver maximum latitude for investing their funds in the years running up to retirement. But it raises the question of how much savings one needs. This can be a little tricky, especially given that things like current life expectancies, future interest rates and future inflation are always in flux.
Giertz mentions that one of the simplest ways of calculating how much you’ll need to have saved prior to retiring is to use what financial planners refer to as the 4 percent rule. This means that the amount of money needed to cover your acceptable lifestyle should be no more than 4 percent of your total savings at age 67. If you plan on retiring earlier, that number should be reduced by one percentage point for every 10 years prior to the age of 67 that you plan on retiring.
However, Giertz is quick to warn people about the implications of the historically low interest rates currently prevailing. This means that savers are not able to see the kinds of returns that have historically been the norm, forcing them to draw down more of the principle amount than normal. For this reason, Giertz recommends that people looking to retire use the more conservative rule that their entire expenses for one year should come to no more than 2 percent of their total savings if planning to retire at age 67 or half a percent less than that for every 10 years that they plan on retiring prior to age 67. This leaves people with plenty of cushion in the event of unforeseen medical expenses, other life emergencies or macroeconomic shocks.
If you’re older, don’t rely on Social Security. If you’re younger, forget about it
Giertz is, perhaps, most strident in his advice regarding the role that Social Security should play in how people plan for retirement. In short, Giertz recommends that those between the age of 50 and 70 seriously discount the long-term value that they estimate to be able to get from Social Security payments. For those under 50, Giertz strongly suggests that they assume they will get minimal value or nothing at all from Social Security when it comes time to retire.
Giertz is among an increasing chorus of professional financial planners who are sounding the alarms about Social Security’s long-term solvency and the very real possibility that those paying into the system today will only get pennies on the dollar for the benefits that they have been promised. For starters, Giertz cites the CBO’s own estimates. CBO projections show that Social Security will begin drawing down its trust fund by 2022 and will become effectively insolvent by 2033. Giertz is quick to point out that this will likely be resolved through Social Security being funded by other means, at least at first. But over the ten to twenty years past the date that Social Security becomes insolvent, Giertz says that all available evidence points to the entire federal budget coming under serious fiscal strain. He says that this is all but guaranteed to eventually result in progressively steep benefit cuts.
Giertz believes that by the year 2060, when many of today’s workers under 30 will be looking to start retiring, Social Security benefits may be all but nonexistent. He warns that the government has done a poor job of truthfully acknowledging the reality of the long-term non-sustainability of the Social Security and Medicare programs. Giertz also states that it is highly likely that many of the government’s own projections are flawed because they assume the same growth of productivity and tax revenues that exists today will continue decades into the future. But Giertz says there are strong demographic reasons to believe that this will not be the case. The worst case scenario, he says, is that by 2050, the entire Social Security system could be dismantled.
Although this paints a gloomy picture for the long-term viability of Social Security, Giertz says that it is imperative that younger people understand it is likely that they will never receive anything close to what current retirees enjoy from the Social Security system and that older people should likewise recognize that they will probably experience significant benefit cuts if they live more than 15 years from today.
Can healthcare costs be easily addressed?
Another huge issue for people considering retirement is how they will pay for their healthcare. Although most Americans over the age of 65 are covered by Medicare, there are a large number of things that require large out-of-pocket costs, and there are many more areas, like vision, nursing homes and hearing aids, that are not covered at all by Medicare. It is, therefore, critical that people who are considering retirement understand the likely costs that they will incur and whether they will have the coverage or cash on hand to pay for them.
Overall, medical costs have been rising at far higher rates than the CPI for decades. Since the early 1970s, real medical costs have increased by more than five times. David Giertz believes that this trend of real-dollar medical costs sharply rising is unlikely to abate anytime soon. At the same time, the vast majority of total medical expenditures result from those in their final decades of life.
This can trick people on the cusp of retirement into believing that their medical expenses will continue to be about what they have been up to that point in their lives. But such estimates can be dangerously misleading. Many studies have estimated that the medical-related costs that a typical 70-year-old couple can expect to pay for the remainder of their lives will total between $300,000 and $400,000. And that’s assuming they’re already covered under Medicare.
Understanding the likely costs of medical care into old age is, therefore, a critical element in good retirement planning. In many cases, David Giertz says that any funding shortfall in estimated funding can usually be mostly covered by selecting the right private insurance plan. This means a little more money up front, but it saves older Americans from the specter of living out their last days with substandard care and leaving their descendants nothing.
Always remember to factor in taxes
Finally, Giertz recommends that anyone considering retirement carefully analyze what their tax situation would look like. Unless retirement funds are structured inside a Roth IRA or Roth 401(k), Giertz says that the money withdrawn will be taxed as ordinary income. For those accustomed to a higher-end lifestyle, this can add up to huge portions of their retirement funds.
For this reason, Giertz recommends that people under the age of 50 always set up a Roth IRA or 401(k) as soon as possible. Having tax-free income in retirement can effectively add up to 50 percent to a retiree’s nest egg. Giertz also reminds people looking to retire that beyond certain income thresholds, even Social Security income is taxed. He says that, although amounts that Social Security is taxed can seem small, over years, they can add up to tens or hundreds of thousands of dollars.
Find more information on David Giertz on About.me
Or follow David on Twitter here: https://twitter.com/david_giertz?lang=en