Rollover

By Don Wilkinson David Wilkinson

Rollover! is the first book targeted to baby boomers on the best course to take with their retirement wealth. Baby Boomers are the 76 million Americans born from 1946 to 1964. They are the most populous, wealthiest, healthiest, most active, most political of any group in our nation’s history.

• Language: English
• Publisher: Hillcrest Media Group
• Release date: Jun 23, 2017
• ISBN: 9781545604526

Book preview

Table of Contents

Chapter 1

Chapter 2

Chapter 3

Chapter 4

Chapter 5

Chapter 6

Chapter 7

Chapter 8

Chapter 9

Chapter 10

Chapter 11

Chapter 12

Chapter 13

Chapter 14

Chapter 15

Chapter 16

Chapter 18

Chapter 19

Chapter 20

The Fork in the Road: A Pause to Plan

Praise for

"The concept of rolling over one’s assets sounds simple enough, and therein lies the danger. If it isn’t done right, tax penalties can devastate an investment portfolio. Rollover cures the angst and anxiety associated with the process in a simple, easy-to-understand and entertaining format. Well worth the read."

John Sullivan, editor in chief, 401(k) Specialist magazine

There needs to be more education on retirement, more discussion around it, and this book helps provide a combination of common sense, case studies, statistics, and insight based on experience that many will find value in.

Richard C. Wilson, CEO of Family Office Club & Wilson Holding Company

"In the 20+ years Don and I have known each other, he has had a unique gift of making complex topics simple and easy to understand. As a top producing financial planner and now a performance coach to thousands of advisers, consultants, and business owners, Rollover is a must-read! Rollover provides simple solutions to what is one of the most important decisions you will make in your lifetime. I recommend you read the book and buy copies for those you care about. It’s that important!"

Annette Bau, CFP, Founder PMA360.com &MillionaireSeries.com

IRAs increasingly are becoming important not so much for new investment contributions but as repositories for money rolled over from 401(k) accounts and other workplace retirement plans.

This trend will continue as more baby boomers retire. Yet comparatively little attention is paid to IRAs as rollover destinations, so there’s a need for books like this.

Russ Wiles, personal finance writer, the Arizona Republic (Phoenix) and www.azcentral.com

Finally a book that simplistically explains the vast choices that over 10,000 baby boomers daily are faced to make with their 401(k)s when they retire. This is the ‘go-to’ book for anyone who wants to make smart choices while avoiding costly mistakes with retirement assets!"

Kimberly Foss, CFP, CPWA and author of New York Times best-selling book Wealth by Design

I’ve known Don Wilkinson for over 20 years and appreciate both his personal approach and writing style in simplifying complex financial subjects. He and his brother Dave have done it again in Rollover in explaining the number of choices a retiring baby boomer has available to them in coming out of a 401(k) retirement plan.

Joe Duran, CEO of United Capital

Copyright © 2016 by Don and David Wilkinson

http://www.rolloverretirementwealth.com

North Loop Books

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All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the authors.

Disclosure: The contents of this book are provided for Information and discussion purposes only, and should not be a basis for your investment decisions. Under no circumstances does this information represent a recommendation to buy or sell securities.

ISBN-13: 9781545604526

LCCN: 2016920369

Distributed by Itasca Books

Cover Design by David Wilkinson

Typeset by M.K. Ross

Printed in the United States of America

There’s something happening here. What it is isn’t exactly clear. Oh, wait. Different song. It is actually perfectly clear.

The baby boom generation, the largest single age cohort in American history, roughly 77 million men and women, is in deep doo-doo when it comes to retirement preparedness. This generation, which has gotten its way and been denied very little in its history in terms of material things, has never been through a depression or even a really bad recession (Author note—exception: 2008 economic downturn). Its members have not learned to save or deny themselves anything so that they can lay away funds for the day they stop getting a regular paycheck.

To be sure, there are multimillionaire boomers and boomers who have been prudent. But the average baby boomer household has financial savings of less than $50,000, not counting their homes. Counting their homes, it’s slightly over $110,000 total net savings.

Fewer than 20 percent have meaningful defined benefit pension plans (we’ll get to these a little later). As anyone at IBM or United Airlines or Delphi can tell you, the defined benefit corporate pension plan as a species in American life is rapidly going extinct.

Social Security is able to pay for about 30 to 40 percent of most retirees’ lifestyles as they are presently lived, at the very best. Medicare is a train wreck.

This means something terrifying. When the boomers retire, as soon as they use up their savings, which will take the average family a few years more or less, they will have to cut their lifestyles in a more dramatic way than any age group in America has done since the Great Depression. The whole glorious dream of living on the golf course, of having a cabin and a boat on the lake, of traveling, of helping out the grandkids . . . well, it was just some people talking. The reality will be having to sell the family house, living under conditions of extreme stringency, waking up at 4:00 a.m. in fear, cutting pills in half, and bitter memories of what might have been.

For many of the oldest of the unprepared boomers, this is now inevitable. There’s no way out. But for the youngest members of the party, the option of saving like madmen is still open. Only it’s not an option: it’s mandatory. In index funds, annuities, mutual funds, real estate, bonds—but best, in all of these things at once.

It is very painful to be poor and old. It is horrible to live in fear and insecurity. But unless the boomers wise up right now, today, and start doing something about it, the future will be grimmer than they would have ever imagined.

Comments by Ben Stein, speechwriter, professional speaker, author, actor, TV personality. Boomers: Saving Less but Enjoying It More. Reprinted with permission.

Baby boomers (born during 1946 to 1964) and seasoned seniors (born before 1946) need guidance on how to manage their retirement accounts, which have accumulated wealth during their working years. Upon reaching retirement age more and more boomers are finding themselves having to make serious decisions about their savings wealth. Outliving their money is a very real issue, as is the need to protect their wealth from taxes and legal pitfalls.

As more baby boomers rapidly move toward the traditional retirement age, they will find that, after years of uncontrolled consumption and an extravagant lifestyle, coupled with the demands put on them by extended family needs, and a roller-coaster economy, they have not saved enough to retire. No boomer will admit to rejecting a leisurely life of playing golf and growing orchids because of a lack of resources. Boomers will simply reject conventional retirement by redefining it.

Your authors are going to do their best to define that redefined retirement by introducing you not only to yourself if you are a baby boomer but also to those individuals we affectionately label seasoned seniors, those of you ahead of the boomers—the silent generation (1923–1944). We’ll also introduce those playing catch-up behind the boomers: the gen Xers (1961–1981).

While we’ll spend some time highlighting the lifestyle of the biggest population bulge in our nation’s history (boomers), our main job is to put you on the right path to take retirement savings into the best investment program your government has ever offered: the traditional IRA and the Roth IRA.

We are going to introduce you to the Rollover! Roll over is what you do with your saved-up retirement wealth after you depart your major employer by retirement, a layoff, or an unexpected departure. Rollover! Get it?

Our book teaches you how to do it, then goes on to tell you how to build that retirement wealth before you pass on. In short, make your wealth last longer than you do. That goes for making sure you have money left over to leave a legacy to your family also.

Our purpose here is to educate you, the reader, on the myths and risks of retirement during the years of the twenty-first century—very different from your parents’ and grandparents’ retirements. The big point we would like to make, and most experts agree, is that a vast number of boomers will be in jeopardy of running out of retirement money before the end of their lives. Predictions by experts, of course, are all over the landscape but most say around 70 percent of boomers and seasoned seniors are going to be in dire need of income during their retirement years.

Thus, the authors intend to present to you the most viable option for preserving and building retirement income: the IRA rollover.

In contrast with the IRA rollover, we’ll explain the advantages of building your retirement wealth by also presenting the Roth IRA. All aspects of the IRA rollover and Roth IRA will then be covered in the following chapters to reinforce that rolling over to these investment strategies is indeed the best decision for your defined benefit and/or defined contribution retirement account(s).

In the end, you’ll be given the pros and cons of each strategy, so you can decide which one works best for you. Or, you could have both if you like.

The following chapters highlight asset allocation, and reveal advantages and disadvantages of each type of asset management choice. This book will also help you make decisions on how to run your own retirement program or hire outside staff (CPA, financial adviser, attorney, etc.).

We even present a new theory about continuing on with your working life, and how doing so will reinforce your income and also boost your well-being and confidence. Did we mention working again might be a fun, enjoyable time for you?

The book summarizes the entire retirement process, cautioning you how to steer clear of potholes in the retirement road and take the right actions in order to "rule your retirement."

Incidentally, you will learn more about the most exceptional group in our nation’s history: the baby boomers.

Enjoy this book and a better retirement,

The authors Don and David

Our dad was cut down with a stroke at the peak of his earning years. His company soon after handed him a forced retirement pension.

When he was well enough, he piled my mother and the two of us brothers into the family car and drove us from our West Virginia home to Florida. He settled us in a little town on the West Coast named Bradenton, home of the world’s largest trailer park at the time and the Boston Braves summer training camp.

Although our father and mother struggled with a minimum pension and health problems, both of us boys grew up pretty normal in the typical way with maximum school and maximum playtime.

Our father always saw to it we both had part-time jobs as soon as we were big enough to mow lawns and deliver the local newspaper. The family was always a cut above a survival lifestyle with plenty of the basic necessities—always recognizing luxuries were for other people.

All the time, we were learning the value of hard work and making our success in the world by our labor and personal responsibility as preached by our father.

We have a lot of respect for our father . . . for the life he led in spite of his unexpected early retirement.

Our parents lived predicable lives . . . because that was what was required of them during their generation. They went on to graduate from high school, work middle-income jobs, get married, have kids, raise our family, work hard (Mother, a stay-at-home mom, and Dad, superintendent at the Union Carbide shipping department in West Virginia before his stroke.), and then retire. In our father’s case: forced retirement.

But today, this is the age of unpredictable living. Life today can go something more like: Born . . . school . . . marriage . . . kids . . . divorce . . . (50 percent chance?) . . . work . . . play . . . school . . . business pursuits . . . travel . . . volunteer efforts . . . other business pursuits . . . play . . . school . . . travel . . . etc.

We are living longer and healthier lives than any generation before us. So . . . even if you work after you’re past 65 or retire before . . . it probably won’t be in a traditional way.

Still, the bills have to be paid.

In other words, your generation has years . . . decades, in fact . . . to fill, but you still have to pay for the longevity bonus. It’s up to us in this book to help you find out how to balance your life in retirement and pay for it too.

Don and David

Part I

The Gray-Wave Tsunami Has Arrived

76 Million Americans Acquiring a Title They Never Wanted: Senior Citizen

Chapter 1

Key Idea: The financial predicament baby boomers may face in their retirement future

Defining Boomers:

Never Met a Purchase

They Didn’t Like

Coming Up a Dollar Short and a Retirement Uncertain

I never think of the future—it comes soon enough.

—Albert Einstein

There’s a train that millions of baby boomers are getting on and it’s beginning to barrel down the tracks toward retirement. Imagine a short distance away on those same tracks is a stalled truck carrying hazardous cargo such as underfunded pensions, shrinking Social Security benefits, and exploding health-care costs. The pending crash is called the retirement crisis, and nearly half of boomers aboard that train are completely unprepared for the imminent disaster.

As boomers step off that train (hopefully before it crashes), most as a group will not possess the financial resources to fuel a full retirement. A full retirement means doing what you always wanted to with similar resources to what you have now.

In many cases, this means dining in fine restaurants anytime you choose—not surviving on a steady diet of Salisbury steak TV dinners. It means traveling to the Galapagos Islands to stomp around looking at lizards older than you instead of overchecking your gas gauge before you depart to Walmart. It means putting down roots in one of those slick retirement communities that feature a hundred never-get-bored activities—not living in your grouchy daughter’s damp basement.

In short, a full retirement is enjoying your time, worry-free.

Grim Retirement Awaits Many Boomers

Baby boomers, the largest, healthiest, and wealthiest group ever to grace the US landscape, never met a purchase they didn’t like. Boomers are noted for purging salary and leveraging appreciation in their starter and move-up homes to pay for cars, college tuitions, and trips. In short, boomers own more stuff than any other group in the nation’s history. There’s a plus side too. Our nation is better off. Boomers propelled our economy to become number one in the world.

Nevertheless, researchers, including Larry Cohen, director of the Princeton, New Jersey–based Consumer Financial Decisions, wonder if boomers, given their spending history, will ever arrive at traditional retirement with any real assets.

As the group responsible for the explosion of credit in the l980s and l990s, boomers are hardly likely to forgo immediate gratification in their later years, Cohen said.

He continued, "The trend among boomers will only be exacerbated when they enter retirement age. The convenience of credit card use with its occasional slip into revolving credit, along with leveraging their assets for around-the-world tours or trips into space, will continue as it has from day one of the boomer explosion.

Most boomers who are not so wealthy and not able to afford the spaceflight type of lifestyle may wind up bequeathing their debt as their legacy instead of the hundreds of thousands that they thought they would accumulate.¹

Spend and borrow, spend and borrow—boomers, who will work well into their 70s, will continue to do both. Why expect them to change when they’ve changed the world?

Spending and Borrowing Their Way to Financial Insecurity

Almost one in two American families is heading toward years of financial struggle in retirement, according to a Center for Retirement Research study that says workers are unprepared for cuts in pension and Social Security income.²

This respected study, which calculated the National Retirement Risk Index (NRRI), estimates that people need 65 to 85 percent of their annual income in their peak working years to be financially secure in retirement. This study was based on conservative projections, but estimated that 43 percent of US households will fall at least 10 percent short of the 65–85 percent range.

Maintaining boomers’ and generation Xers’ (1965 to 1981) preretirement standard of living is key to this index. The percentage of households at risk for an insecure preretirement rises to 66 percent under a less positive set of assumptions. For example, if workers retire at age 63 instead of at 65.

The reason for this gloomy picture is a rapidly changing retirement landscape as defined by a soon-to-be-rising Social Security retirement age, a sharp decline in traditional pensions, modest 401(k) balances, low savings rates, and longer life spans.

Unless Americans change their ways, many will struggle in retirement, said Alicia H. Munnell, a former member of the White House Council of Economic Advisers. There is no silver bullet, she added. The answer is saving more and working longer.

The NRRI study shows that, as of 2013, more than half of today’s households will not have enough retirement income to maintain their preretirement standard of living, even if they work to age 65—which is above the current average retirement age—and annuitize all their financial assets, including the receipts from a reverse mortgage on their homes. The NRRI clearly indicates that many Americans need to save more and/or work longer.³

Americans weaned on postwar affluence have come to expect an extended period of leisure at the end of their work life, an article from the Chicago Tribune says. However, this group is living in a ‘golden age’ that will fade as boomers and generation Xers reach retirement age in the coming decades.⁴

A Boomer Reality Check

However, another study concluded their data on a more positive note.

The 2015 Retirement Confidence Survey (RCS), conducted by the Employee Benefit Research Institute (EBRI),⁵ said that the good news in the survey is the percentage of workers confident about having enough money for a comfortable retirement. The number, which was at record lows between 2009 and 2013, increased in 2014 and again in 2015. Twenty-two percent are now very confident (up from 13 percent in 2013 and 18 percent in 2014), while 36 percent are somewhat confident. Twenty-four percent are not at all confident (statistically unchanged from 28 percent in 2013 and 24 percent in 2014).

Yet, 37 percent of respondents say they are very confident they’ll have a comfortable retirement!

There is a disconnect between perception and reality when it comes to how much people will need to spend in retirement and how best to fund that spending. It won’t surprise you, then, that an earlier EBRI survey found that two-thirds of respondents said they have never tried to calculate how much they need to save for retirement. In fact, less than half of workers age 45 or older say they have given a lot of thought to their retirement-planning needs. Sadly, the majority of boomers have never tried to sit down and calculate how much they need to save.

Another study cautions that many Americans have accumulated only modest retirement savings, underestimated the share of their preretirement income they are likely to need in retirement, and have made no estimate of how much they will need to live comfortably once they retire.⁶

The Institute said people’s expectations for retirement were like a piece of Swiss cheese—full of holes.⁷

Fear of Planning?

Perhaps the biggest stumbling block for boomers is a fear of planning. Procrastination and a lack of confidence due to the lack of knowledge is holding boomers back, keeping them in la-la land until a healthy dose of reality sets in during their retirement years.

As you peruse the numbers, note that another survey said that 31 percent of Americans would rather pick up leaves than plan for retirement.

The numbers in this chart give the percentage of income they think is required to live comfortably in retirement by today’s workers (under 45 and 45 or older). Where do you stand?

Figure 1.1 Percentage of Income Needing to Be Saved for Workers to Have a Comfortable Retirement Retirement Confidence Survey, Employee Benefit Research Institute (EBRI) and Greenwald & Associates, http://ebri.org/pdf/surveys/rcs/2015/RCS15.FS-1.Conf.pdf

What Is Reality?

Here’s an example of what we mean. Say you’re a typical 40-year-old American worker. If you follow the table, there’s about a 50 percent chance that your savings and investments total less than $25,000. Let’s say specifically you have $20,000 put away. You have around 25 to 30 more years of working life. How is that money going to work for you, assuming you earn the long-term average return of the market, which is around 10 percent?

• You have $20,000 at age 40

• You have $51,875 at age 50

• You have $135,550 at age 60

• You have $349,000 at age 70

Most financial advisers agree that you should withdraw no more than 4 percent yearly from your retirement savings to make your nest egg last (kicker: we are living longer). So work the numbers: 4 percent of $349,000 is almost $14,000 yearly. That’s about $1,200 a month. Is that amount sufficient to have the standard of living you enjoy now?

Don’t forget inflation. It’s never gone away. If you check in with one of the inflation calculators on Google, what costs $1 in 2015 will cost $2.45 in 30 years.

Let’s look at it another way. Put in automatic inflation increases into your 4 percent withdraw rate. The first year you have $14,000. The second year, your withdraw will be 1.03 times $14,000, or $14,420. Do you realize now how fast your money can be depleted?

If you’d be happy living off the current equivalent of $50,000 per year for 30 years, your nest egg, if you are withdrawing the 4 percent, will need to top off at . . . $3.75 million!⁸

Figure 1.2 Retirees Will Shoulder 60 Percent of Income Themselves Author sources

Not Your Father’s Retirement

Later on in the book, we’ll talk some more about the three-legged stool of retirement income: Social Security, traditional company pensions, and personal savings. The long-term viability of Social Security is questionable, and traditional pensions are on the wane—replaced by worker contributory plans such as 401(k)s and 403(k)s. Our country is not known as a nation of savers. For now, know that the stool is rather wobbly and would not hold up most people’s retirement posteriors.⁹

We added a fourth leg on the stability brace to include the addition of the equity you have accumulated in your primary residence (assuming you own property). That will give the stool some additional support, but your home shouldn’t be an income source.

Figure 1.3 Stool art concept by authors

The parents of boomers could rely on pensions and Social Security for the bulk of their retirement income. Generation Xers entered the workforce at a time when the uncertainties of pensions and Social Security were becoming readily apparent. Thus, they’ve had more time to adjust. However, boomers have been caught flat-footed by the new realities of retirement.

Speaking of those more self-reliant gen Xers (who should be reading this book also), one has to wonder how long they’ll put up with shouldering the burden for their boomer predecessors, should Social Security projections prove true. For boomers, the advice used to be, Don’t trust anyone over 30. For the Xers and beyond, Don’t trust anyone over 65 might be more appropriate.¹⁰

So goes workplace warfare. The baby boomers think generation Xers need a stronger work ethic, gen X sees the boomers as self-absorbed workaholics—and everyone thinks generation Y is selfish and self-entitled.¹¹

So the world goes . . .

The boomers have made their own bed and will have to live with ever-changing scenarios. For instance, injecting Band-Aid approaches such as increased FICA taxes, reduced benefits, and a higher eligibility age will extend the future of Social Security.¹²

That’s reason enough for boomers to focus on their own ability to save and prepare instead of relying on others and hoping for