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Retirement Income and Legacy Planning — Can You Do Both?

By U.S. News & World Report

Recently, a new client came into my office with two financial goals. Here’s what he told me: “First, I want to know if I can retire today without worrying that I will run out of money. Second, It’s important to me to leave a legacy for my kids and granddaughter.”

For context, he is 66 and has two adult sons. He was smiling when he shared that he had just become a grandfather for the first time. He has saved up a $1.2 million nest egg between his 401(k) and IRAs and has a monthly income need of $6,500. He had already looked into an immediate annuity, where he would be required to give a lump sum to an insurance company in exchange for a monthly payment for the rest of his life.

While a monthly payment for life was intriguing, he decided an immediate annuity was not for him. He did not like the idea that it would take years for him “just to get my money back and break even” and that “the insurance company would keep my money, rather than my kids getting it, if I pass away prematurely.” We worked backwards to create a plan designed to help him reach his goals. Here’s what we discussed.

Evaluate his needs. We started with his retirement income needs and talked about his vision for retirement. He said he could live very comfortably and “do all the things I want on $6,500 per month.” He was already receiving a combined $3,500 per month (net of taxes) from an old pension and his Social Security income. We were left with a need of $3,000 per month in retirement income to be generated from his savings. The good news is that taking a 3 percent annual withdrawal rate on his $1.2 million nest egg generates $36,000 per year, or $3,000 per month.

Determine his risk tolerance. Next, we reviewed his risk tolerance and the fact that he wanted to plan for 40 years in retirement — just to be “extra safe.” We discussed the realities that retirees face, such as the erosive effects of inflation, the likelihood of rising health care costs in retirement, the effect of his sequence of returns as well as managing his portfolio during substantial market declines.

Construct a potential portfolio allocation. Then we needed to construct a portfolio allocation that suited his risk tolerance. While originally reviewing a portfolio of 20 percent stocks and 80 percent bonds, my client shared that he would prefer to be more aggressive to increase his chances to pass on more assets to his kids and granddaughter. Considering these factors, we began evaluating a moderately conservative asset allocation of 40 percent stocks and 60 percent bonds.

Run a probability simulation. We next ran a Monte Carlo analysis where we generated 5,000 simulations of what hypothetically could happen to this portfolio during retirement by looking at a wide variety of potential market scenarios and fluctuating market returns. Each simulation includes up and down markets of various lengths, intensities and combinations. This allows us to have a realistic assessment and probability framework to evaluate his portfolio in the context of his retirement income need.

Analyze the results. The result of the Monte Carlo analysis was a 96 percent probability of reaching his goals. With this chance of success, the likelihood is increased that my client would not only achieve his retirement income goals, but also be able to effectively pass along assets to his kids and granddaughter. Of course, any hypothetical results are for illustrative purposes only and should not be deemed a guarantee of future results.

Next steps. The next steps were to create his written financial plan, implement his designed portfolio allocation and meet with our estate-planning attorney. For multigenerational wealth transfer strategies, advanced planning is a fundamental component.

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Retirement Income and Legacy Planning — Can You Do Both? originally appeared on usnews.com

Don’t Settle for Student Loans to Pay for Online Education

By WTOP Staff
Online college programs are becoming a more popular choice for prospective students, with one study finding that more than 6 million students enrolled in at least one online course in fall 2015. The popularity of these courses can be attributed in part to their flexibility with working adults' schedules, students' ability to progress more quickly through online programs and, oftentimes, cheaper tuition. [See 10 low-cost online bachelor's programs for out-of-state students.]Online degrees can be beneficial to many college students, but some studies have shown online learners complete their programs at lower rates than students at traditional brick-and-mortar campuses. Individuals with student loans but no degree comprise two-thirds of defaulted borrowers. Though these numbers are not encouraging, just like for traditional programs, there are ways to reduce how much you'll need to borrow for an online program to ensure you won't become one of these statistics. Don't just settle on borrowing student loans to cover the whole cost of your program and living expenses. Instead, start thinking about how to cut costs and cover your balance in different ways, such as the following. -- Grants and scholarships: Even though you are taking an online course, you can still apply and receive grants and scholarships. But your first step should be to complete the Free Application for Federal Student Aid, commonly referred to as the FAFSA, which will allow you to receive a Pell Grant if your expected family contribution is low enough. The EFC criteria and award amounts are adjusted annually, but the 2017-2018 academic year awards range from $606 to $5,920, which could significantly lower the amount you borrow annually. Your next step is to apply for scholarships. You can start by checking online scholarship search engines, such as the Salt Scholarship Search, College Board's BigFuture and Peterson's. But don't forget to take advantage of local organizations and your school's financial aid office. Both may offer scholarships that you can't find with a national scholarship search. [Review these 10 sites to kick off your scholarship search.]For instance, organizations like the Elks Club, Knights of Columbus or the Rotary Club typically offer scholarships annually to local students. Just because you're going to school online doesn't mean you're ineligible. Visit your local library for scholarship listings, and ask around town. You might be surprised how many local organizations offer scholarships. While these scholarships typically aren't large, every little bit counts. Each dollar you receive in a scholarship is a dollar you don't have to borrow and pay interest on. -- Work-study: Another option for online students may be work-study awards. Not all students enrolled in online programs are eligible, but students at some schools -- including, for example, SUNY Empire State College and Liberty University -- are. Work-study awards are not given upfront like scholarships and grants. In most cases, they are an offer to earn up to the awarded amount if you secure an eligible work-study job. While there is a misconception that all work-study jobs must be on campus, students can work for off-campus, nonprofit or public employers as long as the work is in the public's interest. You may be able to work for a for-profit employer if the job is relevant to your course of study. No matter who the outside employer is, it will need to have an established agreement with your college for you to receive work-study funds. Remember, to be eligible for federal financial aid, you must be enrolled and pursuing a degree or certificate. If you're not working toward a credential, Pell Grants and work-study won't be option, but you may still be able to take advantage of private scholarships -- just be sure to read the eligibility criteria carefully. [Explore what to know about financial aid in online programs.]-- Pay as you go: One of the great benefits to enrolling online is the flexible schedule, which can allow you to complete your college coursework around your responsibilities. But prospective students often overlook using their part- or full-time job earnings as an option for paying for college. Almost 80 percent of college students in 2015 worked at least part time while attending classes, according to the National Center for Education Statistics. By budgeting and thinking strategically about your college costs, you can likely reduce your dependence on student loans by paying a portion out of pocket. Many -- but not all -- online programs are less expensive than traditional programs and often have shorter payment periods. Six, eight or 10 weeks are common course durations. Because of the frequency of payments in an online setting, you may be well-placed to pay as you go and possibly avoid borrowing altogether. Attending college online and avoiding student loans may be challenging, but if you are willing to put in the effort, you can limit the amount you need to borrow. More from U.S. News Q&A: Understanding Student Loan Discharge Eligibility Student Loan Refinancing Isn't Right for All Borrowers
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