Download - Introduction to Financial Planning Tools
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Insurance and Actuarial Advisory Services
August 5, 2006
Introduction to Financial Planning Tools
2006 IABA Annual Meeting
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AgendaAgenda
• Financial Planning Tools Overview• Focus on the Retirement Planning Market• The New Planning Paradigm• The Actuary’s Role• Questions
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Financial Planning OverviewFinancial Planning Overview
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Circle of Life (Financial Planning Style)Circle of Life (Financial Planning Style)
Initial Meeting
Gather Information
Perform Analysis
Create Action Plan
Annual Check-up
Financial Planning Tools Drive the Analysis, Hence the Action Plan
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Key Planning EventsKey Planning Events
• Key events individuals typically plan for– Purchase of home– Children– College– Retirement– Death
• Different tools for each event
Retirement planning currently incorporates the simplest advice and tools
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Focus On the Retirement MarketFocus On the Retirement Market
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Understanding the Current Basis for Analysis of Retirement PlansUnderstanding the Current Basis for Analysis of Retirement Plans
• “Retirement Planning Software” – LIMRA, SOA, INFRE, a 2003 report
• “Retirement Income: Positioning for Success”– Cerulli Associates, a 2005 report
• “The Forrester Wave™: Financial Planning Software, Q2 2005”, a 2005 report
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The Baby Boomers are ComingThe Baby Boomers are Coming
• 77 million baby boomers– The leading edge of the wave is turning 60– Behavioral finance says they will be different
• Consumption oriented• Goal oriented• More income• More debt
• Three distinct groups– Low Wealth – Middle Wealth– High Wealth
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An Uncertain Retirement MarketAn Uncertain Retirement Market
• Individuals are on their own– Defined benefit plans– 401(k) – Social Security
• Expected lifetimes increasing• Uncertain financial markets
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During the Accumulation PhaseDuring the Accumulation Phase
• Goal: Save $X by age Y• Planning Assumptions
– Contribution rate– Investment returns
• Simplified assumptions are ok– Time is on your side
• Worse case scenario – work an extra year
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During the Decumulation PhaseDuring the Decumulation Phase
• The standard goal: Never run out of money• Current Planning Assumptions
– Investment Returns– Time Horizon– Inflation– Expenses
• Currently simplified assumptions• Worse case scenario – who knows?
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The Proof is in the PuddingThe Proof is in the Pudding
• The “silent” retired received this advice– Retired in the mid-1990s– Advice and planning consisted of
• Individual investments (perhaps)• Asset allocation (more likely)• Recommended withdrawal percentage (most definitely)
– First, suffered through market turmoil from 1999• Asset base was halved
– Then, advised to reduce withdrawal rate by more than half to the current “safe” level of 4%!
“Planning” like this fails to add value
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The Majority of Planning Tools Remain Rooted in Accumulation ThinkingThe Majority of Planning Tools Remain Rooted in Accumulation Thinking
• Investment risk is THE major risk considered• Other risks are treated simply or ignored• Target dates and amounts are the focus• “Yes/No” answers• Single solution
Continued…
A “Safe” Withdrawal Rate Remains the Typical Strategy
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The Majority of Planning Tools Remain Rooted in Accumulation ThinkingThe Majority of Planning Tools Remain Rooted in Accumulation Thinking
• Some tools still– Use fixed rates of return and inflation
• Virtually all tools– Pick a planning horizon or a specific age of death– Fail to consider the impact of lifestyle or health– Fail to consider order of death risk
• Even the best tools fail to reflect– Catastrophic health risks– Product performance
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The New Planning ParadigmThe New Planning Paradigm
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The New Planning Paradigm Will Recognize Risk AppropriatelyThe New Planning Paradigm Will Recognize Risk Appropriately
• Mortality Risk– Order of death– Longevity
• Investment Risk– Market Risk– Interest Rate Risk
• Inflation Risk• Health Care Costs• Long-term Care Costs
“Retirement Planning Software” – LIMRA, SOA, INFRE, a 2003 report
A good retirement planning tool
addresses all of these risks, as well
as solutions to mitigate them.
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Retirement Analytics™ Demonstrates that “Other” Risks Need to be RecognizedRetirement Analytics™ Demonstrates that “Other” Risks Need to be Recognized
Projected Retirement Plan Success Rates100%
87%
65%55%
0%10%20%30%40%50%60%70%80%90%
100%
Plan to LifeExpectancy
ReflectMarket Risks
VariableMortality
+ VariableHealth Care
Costs
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Key Tenets of an Effective Platform in the New ParadigmKey Tenets of an Effective Platform in the New Paradigm
• Holistic in Nature– Wealth– Needs– Risks
• Realistically captures the elements of risk related events– Timing, likelihood, and severity of the risks
• Provides a true decision-making framework• Agnostic• Allows for product demonstration NOT illustration
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Product Illustration vs. Value DemonstrationProduct Illustration vs. Value Demonstration
• Traditional sales illustration not adequate• Need to show how consumer is better off, or
not, with a specific product• Need to show how multiple
products/strategies/solutions can interact
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Traditional Sales Illustration - LongevityTraditional Sales Illustration - Longevity
• Illustration of cashflows• Measure of value typically
IRR– To age 85 – 0%– To age 95 – 8%– To age 105 – 9%
• A difficult sell – IRR to expected lifetime is 0%
Age Cash Flow65 (58,000)$ 66 -$ 67 -$
68-8283 -$ 84 -$ 85 35,000$ 86 35,000$ 87 35,000$ 88 35,000$ 89 35,000$ 90 35,000$
91+ 35,000$
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Value Demonstration - LongevityValue Demonstration - Longevity
• Demonstration of Value • Measure of value:
– Success rate – Estate value at death – Shortfall Measures
• Ability to show multiple strategies and solutions
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Value Demonstration - LongevityValue Demonstration - Longevity
• Female – age 65• $500,000 Conservatively invested• Initial income goal of $25,000 (5% SWP)• Company offering longevity insurance - $35,000 kicking in at
age 85 – cost $58,000
5% SWP LongevityLongevity - Aggressive
Success Rate 65% 73% 82%Estate @ Death 268,061$ 240,800$ 588,459$ Total Average Shortfall 294,296$ 101,408$ 139,799$ Years of Shortfall 6 8 9 Shortfall Per Year 47,570$ 15,208$ 18,492$
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The Actuary’s RoleThe Actuary’s Role
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The Actuary’s RoleThe Actuary’s Role
• Risk Champions• Tool Selection• Product Development and Marketing
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Why Actuaries?Why Actuaries?
• Unique knowledge for modeling:– Mortality risk– Catastrophic health risk
• Ability to design, utilize products to mitigate risks
• Need to bring risk management techniques to these individuals
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SummarySummary
• Current financial planning tools for retirement are not adequate– Simplified, if any approach to key retirement risks– Lack of product integration with planning
• Good financial planning tool– Holistic– Demonstrate value of products/solutions/strategies– Directly compares strategies– Provides information used to make decisions
• Actuaries must act to help their companies capture the opportunity.
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QuestionsQuestions
For More information contact:Chad Runchey
For More information contact:Chad Runchey
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Retirement Analytics™ offered for sale by:
ERNST & YOUNG PRODUCT SALES LLC1559 Superior AvenueCleveland, Ohio 44114(800) 726-7339
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