8 key risks of retirement planning

ADDRESSING R.I.S.K. BUILDING YOUR RETIREMENT INCOME SURVIVAL KIT

RETHINKING INCOME

SIMPLIFYING COMPLEXITY Copyright © 2011 ValMark Securities Inc. All Rights Reserved.

TABLE OF CONTENTS

• Risk Defined

• Traditional Planning

• Key Risks of Retirement

• Building Your R.I.S.K™

Copyright © 2011 ValMark Securities Inc. All Rights Reserved.

RISK DEFINED


Risk: the potential to experience injury or loss


PERSONAL PENSIONS ARE DISAPPEARING:

“California's public pension funds are underfunded

by as much as $500 billion, according to a Stanford University study that was commissioned by Gov. Arnold Schwarzenegger and released Monday.” -CBS (April 5, 2010)

“The future ain’t what it used to be!” - Yogi Berra

RISK DEFINED

“PBGC takes control of underfunded pension of Toyota and GM. Pension plan was only 55% funded with $161 million in assets and $292 million in liabilities” -Wall Street Journal (March 3, 2010)


PERSONAL PENSIONS ARE DISAPPEARING:

RISK DEFINED


NUMBER OF U.S. RETIREES PER 100 WORKERS:

RISK DEFINED

Year Number

1950

1970

2010 (est.)

2030 (est.)

6

27

1990 30

32

46

Data Source: Social Security Administration, “The 2007 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds,” p.48.


RISK DEFINED Conclusion

Guaranteed income streams for life are no longer handed to us at retirement.

Planning for financial security in retirement is a burden now falling directly on our own shoulders.

How can we effectively prepare and plan for retirement?


TRADITIONAL PLANNING


Large Cap

Mid Cap

Small Cap

Bonds

International

T R A D I T I O N A L T H O U G H T – A S S E T A L L O C AT I O N

ACCUMULATION PHASE: ASSET ALLOCATION

TRADITIONAL PLANNING


T R A D I T I O N A L T H O U G H T – A S S E T A L L O C AT I O N TRADITIONAL PLANNING

WHAT IS THE ULTIMATE GOAL?


T R A D I T I O N A L T H O U G H T – A S S E T A L L O C AT I O N TRADITIONAL PLANNING

To Reach the Top? To Reach the Top…

…and Return Safely

or

80% of climbing accidents occur on the descent!


The same is true for retirement planning

…but to use these saved assets to create lifelong income enabling us to live the kind of life we desire to throughout retirement (“making it back down safely”)

The goal of saving for retirement is not merely to accumulate assets (“climbing to the top”)


T R A D I T I O N A L T H O U G H T – A S S E T A L L O C AT I O N THE GREAT TRANSITION

“It’s time to take my savings and turn it into income that I can rely on for the rest of my life.“


The risks we face saving for retirement are different than the risks we face during retirement.


Traditional retirement planning focuses mostly on asset allocation and saving for retirement.

The ultimate goal of retirement planning is to transition savings into life-long, sustainable income streams to satisfy our Needs and Wants throughout retirement.

In order to be successful, we must proactively reassess the assets we have saved for retirement and redeploy them in a way that will address the Key Risks of Retirement (i.e. come back down the mountain safely).

TRADITIONAL PLANNING Conclusion


KEY RISKS OF RETIREMENT


Retirement survival requires the following risks to be addressed:


Market

Sequence of Return

Longevity

Health

Inflation

Liquidity

Taxation

Legacy


Source: McKinsey & Company 2007 Consumer Retirement Survey


Percent of consumers very or extremely anxious over specific retirement risks:

61%

56%

53%

49%

49%

49%

41%

Inflation/tax increases

Health expenses

Market risk

Lack of guaranteed income

Longevity

Interest rates

Social security benefits


MARKET RISK


35 Years

2009: +26.5%

2003: +28.7%

1999: +21.0%

1998: +28.6%

1997: +33.4%

1996: +23.1%

1995: +37.4%

1991: +30.6%

1989: +31.5%

1986: +18.5%

1985: +32.2%

1983: +22.5%

1982: +21.4%

1980: +32.4%

1979: +18.4%

1976: +23.8%

1975: +37.2%

1972: +19.0%

1967: +24.0%

1963: +22.8%

1961: +26.9%

1958: +43.4%

1955: +31.6%

1954: +52.6%

1952: +18.4%

1951: +24.0%

1950: +31.7%

8 Years 1949: +18.8%

2007: +5.5% 7 Years 7 Years 1945: +36.4%

2005: +4.9% 2004: +10.9% 2010: +15.1% 1944: +19.8%

1994: +1.3% 1993: +10.0% 2006: +15.8% 1943: +26.0%

1987: +5.2% 1992: +7.7% 1988: +16.8% 1942: +20.3%

1970: +4.0% 1984: +6.3% 1971: +14.3% 1938: +31.1%

1960: +0.5% 1978: +6.6% 1965: +12.5% 1936: +33.9%

1948: +5.5% 1968: +11.1% 1964: +16.5% 1935: +47.7%

1947: +5.7% 1956: +6.6% 1959: +12.0% 1933: +54.0%

2008: -36.9% 1973: -14.7% 2001: -11.9% 1990: -3.2%

2002: -22.1% 1 Year 2000: -9.1% 1981: -4.9%

1974: -26.5% 1977: -7.2% 1953: -1.0%

1937: -35.0% 1969: -8.5% 1939: -0.4%

1931: -43.3% 1966: -10.1% 1934: -1.4%

1930: -24.9% 1962: -8.7% 5 Years

6 Years 1957: -10.8%

1946: -8.1%

1941: -11.6%

1940: -9.8%

1932: -8.2%

1929: -8.4%

12 Years

MARKET RISK

Average Annual Return: 11.2%

Sources: Thomson Investment View and Standard & Poor’s (S&P), a division of The McGraw-Hill Companies, Inc. Each calendar year listed in chart reflects average annual performance from 12/31 of prior year to 12/31 of listed year. The Standard & Poor’s (S&P) 500 Index is an unmanaged index that tracks the performance of 500 widely held, large-capitalization U.S. stocks. Indices are not managed and do not incur fees or expenses. It is not possible to invest directly in an index. Past performance is not a guarantee or indication of future results. Individual results may vary.

58 positive years: Average positive return 21.45%

24 negative years: Average negative return -13.61%

Positive versus negative average annual returns for the S&P 500 Index: 1929-2010

Down 0%-6%

Down 6%-12%

Down 12%-18%

Down 18%+

Up 0%-6%

UP 6%-12%

Up 12%-18%

Up 18%+


Equities – The Necessary Evil

MARKET RISK

Equity exposure is typically needed to reach certain retirement objectives.

Equities have historically been relied upon to be a

powerful growth vehicle and inflation hedge.

However, Market Risk, if not addressed, could wipe out your entire portfolio before or during retirement.


SEQUENCE OF RETURN RISK



It is not important when buying and holding (average returns work just fine for accumulation).

Once you start withdrawing money in retirement

(distribution), average returns are irrelevant. Example: “If the market averaged 7% annually, I

can safely assume that a 5% withdrawal rate is sustainable throughout retirement.”


Hypothetical

Retirement age 60 years old Investment $1,000,000 Distributions $50,000 every year, increased annually for 3.5% inflation

SEQUENCE OF RETURNS RISK

This is a hypothetical example and is not intended to project the performance of any specific investment.

age

$0

$0.2

$0.4

$0.6

$0.8

$1M

$1.2M

60 70 80 90 100

7%

1) 7%

2) 7% 3) 7%

zero balance: age 97



age

$0

$0.2

$0.4

$0.6

$0.8

$1M

$1.2M

60 70 80 90 100

Hypothetical



100

7%

1) 7%

2) 27% 3) -13%





age

$0

$0.2

$0.4

$0.6

$0.8

$1M

$1.2M

60 70 80 90 100



Hypothetical



7%

1) 7%

3) 27% 2) -13%





If sequence of return risk is not addressed, then successful retirement depends on being lucky enough to retire in the right years.

A solution must be used that facilitates enough

market/equity exposure necessary to reach asset accumulation goals, while still allowing for sustainable withdrawal rates from the portfolio regardless of return sequence in retirement.


LONGEVITY RISK


LONGEVITY RISK

Advances in medicine, technology and increased awareness of healthy living increase life expectancy.

Life expectancy is the halfway point (50% will live beyond this

number). Retirement planning should focus on the probability of survival

(outliving income is a legitimate risk).

Optimized retirement portfolios typically have a lifetime income component because predicting death is impossible.

Source: Tools & Techniques, Life Settlement Planning – 2008



Age Female Male At least one

member of the couple surviving

70 93.90% 92.20% 99.50% 75 85% 81.30% 97.20% 80 72.30% 65.90% 90.60% 85 55.80% 45.50% 75.90% 90 34.80% 23.70% 50.30% 95 15.60% 7.70% 22.10%

100 5% 1.40% 6.30%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

100.00%

70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99100

Female

Male

At least onemember of thecouplesurviving

Probability of Survival at age 65

Source: RP2000 Mortality table; IFID Centre calculations

LONGEVITY RISK


Init

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• Table compares the different portfolios probability of funding retirements for 30 years.

• Careful evaluation

of your asset allocation and initial withdrawal amount in retirement is vital.

• Each Initial

withdrawal assumes a 3% inflation rate.

30 – Year Retirement

Stock / Bond Mix

100/0 80/20 60/40 40/60 20/80

3% 94% 97% 98% 99% 99%

4% 83% 86% 89% 91% 92%

5% 67% 69% 68% 63% 49%

6% 50% 49% 42% 29% 10%

7% 35% 31% 22% 9% 1%

8% 24% 18% 10% 2% 0%

This is a hypothetical example for illustrative purposes only

LONGEVITY RISK

Init

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wal A

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t


HEALTH RISK


HEALTH RISK

Health care costs are growing twice as fast as general inflation.1

2 out of every 3 people age 65 and older will need some form of long term care in their lifetime.2

Health care cost without long term care expenses is the second biggest expense for retirees, averaging about 20% of the couples total monthly expenses.3

About 75 percent of single people and 50 percent of all couples spend all their savings within one year of entering a nursing home.4

1 Fidelity, Investment News- Health-Care Expenses in Retirement Surge , March 13, 2006 . 2 “Americans Fail to Act on Long-Term Care Protection,” The American Society on Aging, May 2003. 3 Are retirees' health costs as steep as some say? Market Watch, March 25, 2010 4 Long Term Care Insurance Tree ,September 2009.


Nursing home national average: $66,850

Nursing home national range: $44,553 – $189,891

Source: Genworth 2009 Cost of Care Survey

HEALTH RISK


IMPLICATIONS:

The majority of people 65 and over will need long term care and the cost of such care is increasing.1

Protecting against these costs is crucial to retirement security. 2

It’s all about you – personal facts require custom planning.

1 “Americans Fail to Act on Long-Term Care Protection,” The American Society on Aging, May 2003. 2 Long Term Care Insurance Tree ,September 2009

HEALTH RISK


INFLATION RISK

“Inflation is the one form of taxation that can be imposed without legislation.” - Milton Friedman, Economist


-60% -40% -20% 0% 20% 40% 60% 80% 100% 120%

INFLATION RISK

• “Inflation has superseded health care risk as the top concern of both retirees and pre-retirees. 58% are very or somewhat concerned and 71%, up from 63% percent in 2007, express concern that the value of their savings and investments might not keep pace with inflation.”

-2009 Risks & Process of Retirement Survey Report of Findings Sponsored by the Society of Actuaries (March, 2010)

Data Source: Bureau of Labor Statistics data to end of 2006; IFID Centre calculations

• The Elderly Spend Differently:

Apparel: -41.3%

Education: -41.3%

Food & Beverage: -24.2%

Housing: 23.5%

Health Care: 117%

Recreation: -21%

Transportation : -29.3%


LIQUIDITY RISK


LIQUIDITY RISK

Change is the one constant we can count on.

Even the best retirement income planning strategy is vulnerable if flexibility is not incorporated to address unexpected events.

Retirement has witnessed many “poor” millionaires.


TAXATION RISK


TAXATION RISK

Sources: taxfoundation.org, 2009 (IRS), usgovernmentspending.com (U.S. budget data and U.S. Census reports)


TAXATION RISK

Taxation risk impacts the planning process for addressing the other key retirement risks

The decisions we make today “eliminate” or “create” opportunities for mitigating taxes in the future


LEGACY RISK


LEGACY RISK

The risk of not being able to leave a financial legacy to the people or organizations we care about most

Making a conscious decision to maximize Lifestyle or Legacy is an important part of planning for retirement

Once the decision is made, the retirement income strategy should be crafted with this goal in mind


We are faced with unique risks in retirement that must each be addressed.

Designing an overall portfolio comprised of complimenting income allocations is necessary to effectively manage these risks.

What is the best process for building an optimized retirement portfolio?

KEY RETIREMENT RISKS Conclusion


“Portfolio optimization is not a single point-in-time solution, but a process that is executed over time.” The Challenge of Optimal Retirement Portfolios, Garth A. Bernard (January 2009)

BUILDING YOUR R.I.S.K™


T R A D I T I O N A L T H O U G H T – A S S E T A L L O C AT I O N RETIREMENT PLANNING MYTHS

Myth#2: The most import thing to focus on in planning for retirement is accumulating enough assets (i.e. What’s Your Number?)

The most important thing about retirement is not just accumulating a lump sum of money, but turning this money into an annual, life-long income streams (i.e. making it

back down the mountain safely)…. “What’s Your Percentage?”

Myth#1: Effective asset allocation explains 95% of investment performance in retirement

As we get closer to retirement, I believe that asset allocation takes on a more limited role, compared to the much more important and critical decision of suitable product (income) allocation.” - Moshe Milevsky Ph.D, Schulich School of Business, York University

Myth#3: The risks we face saving for retirement are the same ones we face during retirement.

Unique risks will fight against retirement income once we begin the distribution phase



• “Any income allocation strategy that does not export all of the longevity, LTC, market and inflation risks will likely fail."

– Jim Otar, Unveiling the Retirement Myth

• “I've run thousands of simulations of hypothetical retirements and ranked what can go wrong. Far and away the biggest causes of failure are longevity risk, inflation and a sour market early in retirement. No one kind of investment works against all three. So you need to diversify among investment products, just as you need to diversify among stocks and bonds and so on.”

– Moshe Milevsky Ph.D, Schulich School of Business, York University



- Jeffrey K. Dellinger, FSA, MAAA – “Efficient Deployment of Retirement Assets to Increase Financial Security of Seniors and to Minimize Welfare Burden on State” September 2007

“Individuals, largely due to a lack of awareness and education about these more optimal ways to deploy a portion of their retirement assets, often end up deploying assets less efficiently than possible to achieve the financial objective of maximizing income while minimizing the probability of outliving it.”




TRANSITION FROM ASSET ALLOCATION TO INCOME ALLOCATION

Effectively transition your retirement savings accumulation strategies to distribution strategies.

1

2 DETERMINE YOUR WITHDRAWAL PERCENTAGE

Determine the percentage of savings you can withdraw as income each year so it is sustainable throughout retirement.

3 ADDRESS RISK

Ensure that your annual income streams are protected against the key risks you will face during retirement.

THE 3 CORE PLANNING PRINCIPLES


BUILDING YOUR R.I.S.K.™

Retain (Accept and Budget)

Avoid (Eliminate, Withdraw)

Reduce (Optimize, Mitigate)

Transfer (Share or Insure)


THE R.I.S.K. PROCESS™

The R.I.S.K. Process™ is a 6 step turn-key program designed to help you address the Key Retirement Risks by building your own custom Retirement Income Survival Kit (R.I.S.K.)™


THE R.I.S.K. PROCESS™


ADDRESSING R.I.S.K.™ Conclusion

We are faced with a retirement crises. Lifelong income streams are no longer handed to us at retirement.

Traditional planning focuses on asset allocation. This is great for accumulation. However, distribution planning requires us to develop proactive income allocation strategies.

In order to “Make It Back Down the Mountain Safely,” these income strategies must work together to address Key Retirement Risks.

It is helpful to use a process to make this great transition. The process should incorporate complimenting income distribution strategies built upon sustainable withdrawal rates that work together to address Key Retirement Risks.


“Despite high levels of concern over retirement, new actuarial study sees little change among Americans in planning for the future.”

2009 Risks & Process of Retirement Survey Report of Findings

Sponsored by the Society of Actuaries (March, 2010)


Are you going to offer to help build them a Retirement Income Survival Kit

(R.I.S.K.)™?

email: [email protected]


8 key risks of retirement planning

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