managing your retirement income - infre consumer workshop 08-06.pdf · managing your retirement...

Managing Your Retirement Income

(C) 2006, National Association of Variable Annuities and the International Foundation for Retirement Education. All rights reserved. 1


Developed by: ©2006, National Association of Variable Annuities and the International Foundation for Retirement Education. All rights reserved.

This presentation may not to be used without permission by NAVA or InFRE

True or false? During retirement…You could spend more than 1/3 of your lifetime

Your expenses might triple or quadruple what they were in the first year

You might spend more than $200,000 in out-of-pocket health care expenses1

You more than likely will spend more on lifestyle expenses than you think

One prolonged illness could wipe out your retirement savings

Negative returns on your investments in the early years could mean returning to work

1 Fidelity Consulting, 2006



The retirement income management process

Step 2

Step 3

Step 1

Step 4

Step 5

Step 6

Maintain and Update the Plan

Determine your retirement income strategy

Plan for Taxes & Bequests

Plan for retirement risks

Identify retirement income needs and resources

Identify your definition of retirement success

What are you retiring to?

In other words, are you ready for a month of Saturdays?

Step 1: Identify your definition of retirement success



What it takes to be retirement ready*

Retirement readiness consists of being prepared:

FinanciallyGeographicallyBiologicallyMedicallyPsychologicallySocially

*The InFRE Retirement Readiness Profile, 2005.

Engagement (Happiness)

HealthWealth(Prosperity)

Total Retirement Income Need

Essential Expenses Discretionary Spending

Step 2: Identify retirement income needs and resources

Where saving has the most impact on building your nest egg,how you spend it has the most impact on how long it will last.



Number of observations: Not retired: 786-789; Retired: 1613-1617. Singles and Couples. Wealth and income quartiles calculated by marital status and retirement status. Source: The Retirement-Consumption Puzzle: Anticipated and Actual Declines in Spending at Retirement, the RAND Land and population Program, March 2003

Beware of overspending early in retirement

CURRENT SPENDING$$$

$

PROJECTED RETIREMENT SPENDING

- 22%

ACTUAL RETIREMENT SPENDING

- 8%

Money Stages & Changing PrioritiesIncreased spending (“go go”)

Early retirement

$ -S

pend

ing

in R

etire

men

t

Slower spending

(“slow go”)

Mid retirement

What spending? (“no go”)

Late retirement



Retirement Income Sources

1. Social Security - When to start?

2. Employer-sponsoredretirement plans

- How to take distributions? - When to begin pension?- Joint or single life?

3. Personal savings- Where to invest?

4. Work (wage income)- Availability of work?- Ability to work?- Desire to work?

When to start Social Security benefits

Key factors to consider are health and longevity risks

Impact on surviving spouse benefits

Up to an 8% increase each year between FRA and age 70

Potential reductions due to employment and taxation of benefits

$22,38070

$16,06866

$13,51264

$11,38862

Annual benefit*Age

*Source: www.ssa.gov - Social Security Quick Calculator estimate based on earnings of $50,000 at age 62.



A retirement of uncertain length

1. Longevity Risk

You need a plan to help you make sure your retirement assets last a lifetime!

Step 3: Plan for retirement risks

Expenses increasing faster than your retirement income over time

2. Inflation Risk

Skyrocketing and unknown health and long-term care costs

3. Health Care Cost Risks

You need a plan to help you make sure your retirement assets last a lifetime!

Step 3: Plan for retirement risks

Stock market and interest rate volatility

4. Investing Risks



0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%

65 75 85 95 105Source: 2000 Individual Annuity Mortality table

Average Life Expectancy

Annual Percentage of DeathsPopulation of 65 Year Olds

1. Longevity Risk

% of actualdeaths

Age

Source: Society of Actuaries RP-2000 Table

%

Age

Life probabilities at age 65

0102030405060708090100

70 75 80 85 90 95

Male

Female

1 Member ofa Couple



2. Inflation Risk

724%

Compounded inflation

18 years for expensesto double

=

Age Expenses

55 $50,000

73 $100,000

91 $200,000

25

Assisted living facility base rates1:

– Average: $30,288/yearHome health care2:

– Average: $18/hourLong-term care2:

– Average semi-private room cost: $61,685/year

Out-of-pocket expenses3:– $200,000 for Medicare premiums/cost

sharing & prescription drug expenses

Lack of Insurance Can Wipe Out Even the Best-Laid Plans:

1 MetLife Mature Market Survey of Assisted Living Costs, 2004

2 MetLife Market Survey of Nursing Home and Home Care Costs, 2004

3 Fidelity Consulting, 2006

3. Health Care Cost Risk



Long-Term Care Costs

Annual Cost for Long-Term Care Coverage2

Age 45 Age 50 Age 55 Age 60 Age 65 Age 70 Age 75

$1,361 $1,399 $1,512 $2,117 $3,062 $5,027 $8,883

Midwest$33,580 to $146,000

Northeast$40,150 to $164,250

Southeast$29,200 to $153,300Southwest

$30,660 to $88,330

West**$39,785 to $101,470

Annual nursing home costs by region1

1 Source:General Electric Capital Assurance Company, 2003. 2The costs shown are for non-inflation-adjusted coverage and assume the couple qualifies for standard health rates. Policy coverage is assumed to be a lifetime benefit covering up to $75,600 per year in costs, and includes a 180-day elimination period. Where nursing home costs exceed $75,600, long-term care insurance will not cover all costs of a nursing home stay. Source:General Electric Capital Assurance Company, 2003. ** Excludes HI, AK

Source: Stocks, bonds, bills and inflation, U.S. treasury Bills Total Returns, Ibbotson Associates

$370.9%Jan., 2004

$2425.8%June, 1995

$3678.8%March,1989

$67516.2%May, 1981

Income PerMonth

Treasury Bill Annual RateMonth, Year

Annualized income on $50,000 invested during:

4. Investing Risks a. Interest Rate Risk



4. Investing Risksb. Volatility Risk

Each bar shows the range of compound annual returns for each asset class over the period 1926–2005. Source: AdviceAmerica Used with permission.

Largecompanystocks

Long term government

bonds

Treasury bills-30%

-20%

-10%0%

10%20%

5.5% 4.5%

For the period 1926–2005

This is for illustrative purposes only and not indicative of any investment.Past performance is no guarantee of future results. 4/1/2006.

30%

40%

50%

60%

-40%-50%

5-year holding periods1-year holding periods

20-year holding periodsCompound annual return

10-year holding periods

10.4%

Reduced Over Time

Q. If you had $100,000 averaging 6% per year, andyou withdrew 6% per year, what would yourbalance be at the end of 10 years?

A. Depends on two factors:1. Are there any years with negative returns?2. When do the losses occur?

4c. Point-in-Time Risk



6%

71,5316,00010.63%1070,6616,00010.63%969,8746,00010.63%869,1636,00010.63%768,5206,00010.63%667,9396,00010.63%567,4146,00010.63%466,9396,00010.63%366,5106,000-10%2$79,900$6,000-15%1

Ending BalanceWithdrawalRate of ReturnYear

$100,000 hypothetical investment with loss in the early years

Average ROR

Ways to Manage Risks

Plan beyond average life expectancy (self and spouse)

Preserve purchasing power - vs - conserve capital

Transfer health care risks

Diversify investments and invest for the long-term

Expect the unexpected in the early years



Step 4: Plan for Taxes & Bequests

To minimize taxes, where should income come from first, second, third etc…?

Will you be in a lower tax bracket in retirement?

When does it make sense to convert into and take money out of a ROTH IRA?

How much of your Social Security benefits can you spend?

How will you plan for required minimum withdrawals starting at 70 ½?

Who will inherit your legacy and how?

Before $12,480 in 2006 $1 for every $2 of excess earnings

Actual year $33,240 in 2006 $1 for every $3 of excess earnings

After No reduction

Reduction in Benefits

Earnings Limit

Full Retirement

Age

How much of your Social Security can you really spend?



12004 Social Security Manual, The National Underwriter Company2And who lived together at any time during the year.

Taxation of Social Security benefits

$34,000$25,000Single taxpayers

$44,000$32,000Married couples filing jointly

85% of benefit taxable

after threshold

of

50% of benefit taxable

after threshold of

Filing Status

Assume you are 65 and just won $100,000 in the lottery. You are given the choice of taking:

A. Lump sum of $100,000B. $698 a month for life1

Which would you choose?

Step 5: Determine your retirement income strategy

1. Source: “www.immediateannuities.com.” Assumptions: $100,000 single life annuity for male Illinois resident.

Why?




Managed Income Sources(assets under your control but income is not guaranteed for life)

Taxable assetsPersonal retirement accountsEmployment incomeOther variable sources

Lifetime Income Sources (assets not under your control, but income is guaranteed for life)

Social SecurityPensionsAnnuitiesOther lifetime income sources

Fill Income Gap (A)

Fill Income Gap (B)

How to manage your retirement income

Which retirement income Method is best for you?



1. Preserve principal & live off the earnings (Income only plan)

2. Spend investment earnings and principal(systematic withdrawal plan - SWP)

3. Create lifetime income for essential needs (Additional lifetime income plan)

4. Combinations of 1, 2 & 3 = diversified asset & income allocation

Ways to create an income stream from your savings

Long-term bond interestLaddered certificates of depositDividend incomeRental incomeReal Estate Investment Trusts (REITs)

Risk: under-consumption, or living beneath means, and limited growth potential

Retirement income option #1:Income (earnings) only plan



– Regular distributions (i.e. quarterly or monthly) of investment earnings and principal throughout retirement.

– A withdrawal amount based on a percentage of savings at the time of retirement determines the first year income.

– Withdrawals are increased each year to account for the effect of inflation on expenses.

Retirement income option #2:Systematic withdrawal plan (SWP)

How it works

Why it works– Research indicates that a initial withdrawal rate of 4% - 5% of the portfolio

in the first year is “safe” over a 30 to 40 year retirement.

(i.e. 5% on $100,000 = $416.67/month or $5,000 annually in first year)

Retirement #1

Retirement #2

Retirement #3

Retirement Savings

65 75 85 95 Age

How long will your savings last?

Spending?Inflation?

Longevity?Return on Investments?

$$$

$



Retirement income option #2:Systematic withdrawal plan (SWP)

Pros- Full asset ownership and control- Distributions can increase with inflation- Withdrawal flexibility

Cons- No guarantee of lifetime income- Assumption of Market Risk

ResourcesYr. 1 of retirement

to age 70 ½

Retirement income investments

Need

$$$

Resources

Age 70 ½ - 80

Income and growth

Investments

$

Resources

Age 80 plus

GrowthInvestments

Divide your assets into “phases of retirement” buckets (asset allocation)

Phase 1 Phase 2 Phase 3



– Lump sump investment– Monthly distribution for

fixed period/lifetime– Fixed or variable payments

depending upon type of annuity selected

Retirement income option #3: Additional lifetime income planPayout Annuities:

Why do they work?– Some people live longer than

others– Those who live longer receive

the funds of those who died earlier

How do they work?

Retirement Advisor: $95k/4 = $23.75k each or 19% return

Banker:$105k/5 = $21k each or 5% return

Actuary:$105k/4 = $26.25k each or 31% return

Example adapted from “Grandma’s Longevity Insurance,” Moshe A. Milevsky, October, 2004

The Lonely Hearts Club, or “The Five 95 Year-Olds”



Impact of creating additional lifetime income

Retirement income option #3: Additional lifetime income plan

Pros- Provide lifetime income*

Cons**- Reduces estate value- Limited withdrawal flexibility- Distributions may not increase with

inflation (Fixed Annuity)

Payout Annuities:

* Annuities are issued by insurance companies and lifetime income is based on the on-going financial stability of the issuing company

**Certain annuities today offer provisions that reduce the impact of the cons above – additional expenses may apply



SWP: 5% initial withdrawal 4% inflation annually

Retirement income option #4: Combinelifetime income and a SWP

SWP: 5% initial withdrawal 4% inflation annually, Annuity: www.immediateannuities.com, Life only annuity, male, state of Illinois




SWP: 5% initial withdrawal 4% inflation annually, Annuity: www.immediateannuities.com, Life only annuity, male, state of Illinois


Bonds

Cash

Stocks

Asset Allocation

What is the Ultimate Goal in Retirement Income Planning?

To create an integrated asset and income allocation strategy

Income Allocation

Managed Income Sources

Lifetime Income Sources




Managed Income Sources

Taxable assetsPersonal retirement accountsEmployment incomeOther variable sources

Lifetime Income Sources

Social SecurityPensionsAnnuitiesOther lifetime income sources

Fill Income Gap (A)

Fill Income Gap (B)

How to manage your retirement income

What are your choicesfor closing your income gap(s)?

Remember that combinations of all the above may be used to close gaps.

6. Use home equity

5. Spend less

4. Work full-time/part-time (phased)at same or new job

3. Postpone Social Security & Pension

2. Add additional lifetime income

1. Reposition managed assets

DiscretionaryGap

EssentialGapChoices for Closing GapsPriority



Experience point in time risk positively or negatively

– Market– Interest rates

Death of a spouse

Actual spending

Health

Going back to work

Step 6: Maintain and Update the Plan

62

When:

Other reminders

Include all retirement assets in your planningConsider combining retirement savings or rollover assets to simplify Evaluate suitability, fees and expenses of investment optionsReview and monitor your plan at regular intervalsFind a qualified advisor



The retirement income management process

Step 2

Step 3

Step 1

Step 4

Step 5

Step 6

Maintain and Update the Plan

Determine your retirement income strategy

Plan for Taxes & Bequests

Plan for retirement risks

Identify retirement income needs and resources

Identify your definition of retirement success

managing your retirement income - infre consumer workshop 08-06.pdf · managing your retirement...

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