Preparing Financially…

Grace S. Yung
Grace S. Yung

For your “Next 50 Years”
by Grace S. Yung, CFP

(See past MoneySmart columns)

Today, the biggest fear on the minds of many retirees and those who are approaching retirement is that of outliving their money. While longer life spans can allow one to enjoy more time in retirement, lower savings rates and volatile market conditions have left many investors without much of a nest egg.

Couple that with disappearing pensions and a dwindling Social Security program, and you start to see many retirees staying in the workforce longer or drastically reducing their lifestyle in order to make expenses meet income. This is especially true for same-sex couples, who have until recently been denied any type of spousal retirement benefits from programs such as Social Security and most company pension plans.

Disappearing Pension Income

In the past, a person’s retirement years didn’t typically last as long as they do today. Now, it is not uncommon to live long, vibrant lives for twenty, thirty, or more years after the employer’s paychecks stop.

Previous generations also had many more income guarantees than retirees have today. In many cases, retirees were offered a lifetime income through an employer pension—and in some instances, retiree health insurance was also included. In many cases, pension income could also continue for a legally married surviving spouse following the retiree’s death.

While the majority of companies today do not offer true “defined benefit” pensions, those in the LGBT community who have access to these retirement income plans may now be able to include their legally married partner in these pension benefits as a joint income recipient.

Prior to the June 2013 legislation striking down DOMA, though, a surviving same-sex partner could potentially lose a majority—if not all—of their retirement income if their retiree/partner predeceased them, as benefits would have stopped at the retired partner’s death.

Social Security May Now Be More Secure

Likewise, many LGBT married couples today can also feel more secure with Social Security benefits that are based on a partner’s work record. Traditionally, non-working legally married spouses—as well as spouses with a lower earnings history—have been able to claim Social Security retirement benefits, survivor’s benefits, disability income, and even ex-spouse’s benefits based on their spouse’s work record.

The same had not previously been so for same-sex couples. Countless LGBT partners have lost out on millions of dollars in benefits that their heterosexual married counterparts were eligible for.

Now, however, the Supreme Court has affirmed that there should be no exceptions in how the federal government regards marriage—regardless of whether a person’s spouse is of the same or the opposite sex. Therefore, same-sex married partners will now be allowed to partake in Social Security benefits that have provided an income safety net to workers and their spouses for nearly eighty years.

Challenging “Traditional” Retirement Income Rules

When coordinating retirement income sources, one common retirement income generation approach used for many years has been the drawing down of a certain amount of savings from a retiree’s investment portfolio.

Using this strategy, 4 percent of a portfolio consisting of approximately 50 percent equities (a diversified portfolio of domestic and international) and 50 percent bonds could be taken each year to provide a retiree with a livable income throughout their retirement years.

But research has recently shown that due to current market conditions, inflation, and longer life spans, a portfolio with a 50/50 mix of stocks and bonds will actually yield closer to 2.8 percent, and that by following this “4 percent rule,” a retiree could be at great risk for outliving his or her savings.
In fact, even a portfolio containing closer to 60 percent bonds and only 40 percent equities could have more than a 50 percent chance of being depleted within a twenty-year time period—especially in a lower interest-rate environment. Here, too, LGBT couples could run into additional obstacles to ensuring that both partners have enough income to live comfortably—regardless of how long that may be.

Creating Long-Term Income Strategies

In addition to simply creating income strategies for retirement, LGBT couples can face some additional challenges when it comes to accessing funds that are held in accounts with different names. Therefore, it is important to pay attention to account titling as well as the proper income-generating strategies when setting up future incoming cash flow.

When setting up an income-generating strategy, it is also important to ensure that the funds will generate enough growth to prevent running out of money down the road. In order to accomplish this, it is necessary to maintain a diversified mix of investments that will earn returns that exceed the rate of inflation. Some strategies that have worked well over time include bond laddering and the use of fixed annuities.

Bond ladders are often used for generating income, while at the same time taking advantage of the higher interest rates that are offered on longer-term bonds. This strategy entails purchasing several bonds with different maturities. With this bond “ladder,” the maturity dates on the bonds are evenly spaced across several years such that the bonds will mature—and subsequently the proceeds are reinvested—at regular intervals.

As an example, if an investor had just one $25,000 bond earning 2.5 percent per year that matured in five years, he would not have access to his funds for five full years. In addition, if interest rates increased during that time, he would be stuck earning the lower amount.

But, if the investor instead had five $5,000 bonds that were “laddered” so that one bond matured each year, the investor would easily be able to reinvest the funds from a maturing bond each year—potentially taking advantage of higher interest rates, and a higher amount of retirement income.

Fixed annuities are one of the only financial products that offer the option to turn your assets into a stream of income payments that cannot be outlived—no matter how long that may be. These insurance products can also allow for another person such as a spouse or partner to receive income for the remainder of their lives as well. This feature is typically available as a rider for an additional fee. In addition, annuities can provide a death benefit, allowing a partner or other loved ones to obtain the unused funds in the account.

These types of accounts are also great vehicles for satisfying the Required Minimum Distribution (RMD) rules on “qualified” retirement savings that are held in accounts such as 401(k)s and traditional IRAs.

For those wishing to retire early, a fixed annuity can offer a great way to receive income from retirement accounts without incurring the 10 percent early withdrawal penalty—even if you’re younger than 59½. Here, there are no taxes due for transferring funds from an IRA or 401(k) into an income annuity. This is because the annuity remains an IRA. And, Section 72(t) of the Internal Revenue Code allows anyone of any age to take “substantially equal withdrawals” from this qualified money, provided that certain requirements are met.

Taking the Next Step

When developing any type of retirement income strategy, it is essential to make sure that accounts are properly titled so that one partner will not lose income should the other pass away. It is also important to account for any taxes that may be due on the incoming funds.

For this reason, it is important that all tax and financial planning be done by a qualified professional who has knowledge of tax and financial-planning concepts, as well as the strategies that are appropriate for LGBT individuals and couples who have diverse financial planning needs.

Grace S. Yung, CFP, is a certified financial planner practitioner with experience in helping domestic partners plan their finances since 1994. She is a principal at Midtown Financial LLC in Houston.


See other MoneySmart columns:

Loved Ones in Need (October 2013)
The cost of caring for an aging family member

After the DOMA Ruling (September 2013)
Couples still need to watch for potential land mines.

Saying Goodbye to DOMA (August 2013 OutSmart)
What it really means.

Critical Illness Insurance (July 2013 OutSmart)
Filling in the gaps.

Implementation of Obamacare (June 2013 OutSmart)
How LGBTs can prepare.

The Aging Population (May 2013 OutSmart)
How LGBTs folks can prepare for living longer.

Staying on Top of the Fiscal Cliff (April 2013 OutSmart)
How to maximize your investments, even if your paycheck is smaller

Finding the Funds …to make your IRA contribution (March 2013 OutSmart)

Have You Made Your 2012 IRA Contribution Yet? (February 2013 OutSmart)
There is still time!

What’s Different for 2013? (January 2013 OutSmart)
Considerations for Texas and your future investments.

LGBT Partners… (December 2012 OutSmart)
Working around the denial of your government benefits

Future Tax Rules Can Further Penalize LGBT Investors (November 2012 OutSmart)
But there is still time to act

Protecting your Wallet and your Heart (October 2012 OutSmart)
How and when to keep assets separate—even when you’re madly in love

Domestic Partner Tax Deductions in Home Ownership (September 2012 OutSmart)
With today’s historically low interest rates, it’s certainly a great time to either purchase or refinance a home.

Dying Intestate (August 2012 OutSmart)
Could you be leaving the state in charge of distributing your assets?

Protecting the Things that Matter (July 2012  OutSmart)
How those in the LGBT community can use life insurance planning strategies

When ‘I Do’ Becomes ‘I Don’t Anymore’ (June 2012 OutSmart) 
Ensuring both partners’ fair share with a Domestic Partnership Agreement

Retirement (May 2012 OutSmart)
Using annuities can provide lasting income for both domestic partners: When depending on a partner’s retirement income, annuities can offer the perfect solution

Financial and Tax Planning Issues for Domestic Partners (April 2012 OutSmart)
Is Uncle Sam getting a bigger chunk of your income and wealth?

The Real Cost of Long-term Care (February 2012 OutSmart)
How LGBT caregivers are paying the price

Gay Money Matters (part 1) (February 2010 OutSmart)
Domestic Partners: Estate and Tax Planning

Gay Money Matters (part 2) (February 2010 OutSmart)
Protecting your assets . . . even when the rules don’t

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Grace S. Yung

Grace S. Yung, CFP, is a certified financial planner practitioner with experience in helping domestic partners plan their finances since 1994. She is a principal at Midtown Financial LLC in Houston and was recognized as a “Five-Star Wealth Manager” in the September 2017 issue of Texas Monthly.

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