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TRANSCRIPT
Insights and tips to help you make informed decisions about retirement
Second Edition
INCOME SAVVY®
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3 Today’s Retirement Realities You may need to plan for a retirement that lasts 30 years or longer
9 Behavior Matters Your current spending pattern and tolerance for risk may help indicate your
retirement income needs and the retirement income solution that’s right for you
16 Generating Reliable Income in Retirement An annuity may help you secure guaranteed lifetime income
TABLE OF CONTENTS 1
INCOME SAVVY
When it comes to generating income for retirement, there are a number of key insights and
important factors you may want to consider, with the help of your financial professional.
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Annuity guarantees are backed by the claims-paying ability of the issuing insurance company.
This material is intended only for educational purposes to help you, with the guidance of your financial professional, make informed decisions. We are not a fiduciary and do not provide investment advice or recommendations.
Today’s Retirement Realities
3 Introduction
4 Responsibility for retirement income
5 Life expectancy probabilities
6 Impact of wealth on life expectancy
7 Impact of health on life expectancy
8 Rising annual health care costs in retirement
Behavior Matters
9 Introduction
10 What type of a retirement spender will you be?
12 The Grasshopper vs. the Ant
13 How your spending may change during retirement
14 Decline in financial literacy over time
15 Attitude toward loss
Generating Reliable Income in Retirement
16 Introduction
17 When interest rates are low, bond returns may also be low
18 Cost to generate $1,000 of annual bond and dividend income
19 The “4% Rule” has become the “2.8% Rule”
21 Market performance can impact how long your savings may last
22 Market Performance - Impact during savings years
23 Market Performance - Impact once withdrawals begin
24 Will you outlive your retirement income?
25 How much of your retirement income is protected?
26 Benefits of annuities for guaranteed lifetime income
27 Generating income from your savings and investments
DETAILED TABLE OF CONTENTS 2
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TODAY’S RETIREMENT REALITIES
3
See pages that follow for additional information
• Retirement has changed. The burden of funding retirement has largely shifted from the employer to the individual.
• Retirement may last longer than you think. You may need to plan for a retirement that lasts 30 years or longer. What’s more, the wealthier you are, the longer you may live.
• Rising health care costs—including the cost for long-term care—should be carefully considered as you develop your retirement income strategy.
• Fewer individuals are covered by traditional defined benefit pension plans today, which may put a greater burden on retirees to fund their retirement with income from personal savings and investments.
INCOME SAVVY
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INDIVIDUALS NOW RESPONSIBLE FOR RETIREMENT INCOME 4
THE BURDEN HAS SHIFTED
In the past, workers with defined benefit pensions enjoyed guaranteed income during retirement without worrying about investment decisions or the threat of outliving their money.
Today, many retirees are without pensions and responsible for retirement income through 401(k)s and other defined contribution plans. This, in effect, has reduced the once sturdy “three legged stool” for retirement income (pensions, Social Security & personal savings) into a wobbly two-legged stool supported by Social Security and personal savings only.
DEFINEDBENEFIT
DEFINEDCONTRIBUTION
8%
28%34%
2%
0%
25%
50%
1980* 2014*
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Defined Benefit Plans (pensions) have largely been replaced by Defined Contribution Plans such as 401(k)s
Source: Employee Benefit Research Institute, 2017
Perc
enta
ge o
f priv
ate
sect
or w
orke
rs p
artic
ipat
ing
in a
n em
ploy
men
t-bas
ed re
tirem
ent p
lan
*11% of workers participated in both types of plans.
n Defined Benefit n Defined Contribution
Reti
rem
ent l
ands
cape
Life expectancy probabilities | 5
Chart: Social Security Administration, Period Life Table, 2013 (published in 2016), J.P. Morgan Asset Management.Table: Social Security Administration 2016 OASDI Trustees Report.Probability at least one member of the same-sex female couple lives to age 90 is 55% and a same-sex male couple is 39%.
PLAN FOR LONGEVITY
Average life expectancy continues to increase and is a mid-point not an end-point. You may need to plan on the probability of living much longer—perhaps 30+ years in retirement—and invest a portion of your portfolio for growth to maintain your purchasing power over time.
If you’re 65 today, the probability of living to a specific age or beyond
0%
20%
40%
60%
80%
100%
85%79%
97%
73%
63%
90%
55%
43%
74%
33%
22%
48%
13%
7%
20%
3% 1%4%
75 years 80 years 85 years 90 years 95 years 100 years
Perc
ent
n Women n Men n Couple—at least one lives to specified age
Year Women Men Difference
1990 84.1 80.1 4.0
2015 85.5 83.1 2.4
2090 89.6 87.6 2.0
Average life expectancy at age 65
LIFE EXPECTANCY PROBABILITIES 5
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Source: J.P. Morgan Asset Management. Guide to RetirementSM–2017 Edition–Page 5.
IMPACT OF WEALTH ON LIFE EXPECTANCY 6
MORE WEALTH MAY EQUATE TO MORE YEARS
Research shows that the wealthier you are, the longer you may live—and the increase in additional years is actually greater for men than women, as shown here.
For example, the wealthiest American men born in 1940 may live an average of 5.9 years longer than similar individuals born 20 years earlier in 1920.
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Change in average additional life expectancy in years at age 55, by income, between groups born in 1920 and 1940
Source: Josh Zumbrun, “The Richer You Are the Older You’ll Get, “ blogs/wsj.com, April 18, 2014. Data compiled by Barry Bosworth at the Brookings Institution using data from the University of Michigan’s Health and Retirement Study, a survey that tracks the health and work-life of 26,000 Americans as they age and retire.
-3 -2 -1 0 1 2
Change (in years)
3 4 5 6 7
Poorest 10% 1.7
2.7
3.3
3.6
3.90.5
1
1.4
1.8
2.4
3.1
4.2
4.6
4.9
5.3
5.9
-0.2
-1
-1.6
-2.1
11%–20%
21%–30%
31%–40%
41%–50%
51%–60%
61%–70%
71%–80%
81%–90%
Richest 10%
Women Men
Source: Social Security Administration 2013 Period Life Table, Society of Actuaries 2012 Annuity Mortality Table.
Male Female Bothmembers
At leastone member
Healthy American 20% 29% 6% 43%
Average American 7% 13% 1% 20%
IMPACT OF HEALTH ON LIFE EXPECTANCY 7
BETTER HEALTH MAY EQUATE TO MORE YEARS
Research shows that healthy American 65-year-olds have a much greater probability of living to age 95 than average 65-year-old Americans.
Consider this, there’s a 43% chance that at least one member of a healthy 65-year-old couple will live to age 95 vs. a 20% chance for an average 65-year-old couple.
Probability of living to age 95
Couple
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Rising annual health care costs in retirement | 26
$2,500
$5,000$5,140
$15,610
Annualgrowth6.5%
5.7$7,500
$10,000
$12,500
$15,000
$17,500
$20,000
$0Age 65 Age 85
$18,110
(2017) (2037)
1,610 2,480
3,0201,970
7,910
550
2,200
2,500Uncertainties (health care inflationvariability, Medicare solvency issues)
Vision, dental & hearing
Medigap Plan F (covers Parts A and Bco-pays and deductibles)
Part D premiums and prescription out-of-pocket costs (may vary widely)
Part B (doctors, tests & outpatienthospital insurance)
1,010
Notes: Age 85 estimated total median cost in 2017 is $7,195. Medigap premiums usually increase due to age, in addition to annual inflation, except for most policies in the following states: AR, CT, MA, ME, MN, NY, VT, WA, AZ, FL, ID and MO. Analysis includes Medigap Plan F (the most comprehensive plan). Parts B and D additional premiums are calculated from federal tax returns two years prior; individuals may file for an exception form SSA-44 if they reduce or stop work. For the definition of MAGI, please see Guide to Retirement slide 36. *Additional premium includes a projection of 2018 costs for a 65-year-old beneficiary in 2018 ($5,076), plus the surcharge percentage specified in the Medicare Access and CHIP Reauthorization Act of 2015 (MACRA/”doc fix bill”).Source: Employee Benefit Research Institute (EBRI) data as of December 31, 2016; SelectQuote data as of January 16, 2017; Centers for Medicare and Medicaid Services website, January 25, 2017; 2016 Medicare Trustees Report, June 22, 2016; J.P. Morgan analysis.
Spen
ding
Traditional Medicare estimated median health care costs per person
A GROWING CONCERN
Given variation in health care cost inflation from year to year, it may be prudent to assume an annual health care inflation rate of 6.5%, which may require growth as well as current income from your portfolio in retirement.
Additional premium per person for Modified Adjusted Gross Incomes (MAGI) of:
FILING SINGLE MARRIED FILING JOINTLYADDITIONAL PREMIUM TOTAL MEDIAN COSTS2017 2018* 2017 2018*
$85,001 - $107,000 $170,001 - $214,000 $802 $722 $5,942 $5,798107,001 - 133,500 214,001 - 267,000 802 1,820 5,942 6,896133,501 - 160,000 267,001 - 320,000 2,017 2,928 7,157 8,004160,001 - 214,000 320,001 - 428,000 3,234 4,018 8,374 9,094
> 214,000 > 428,000 4,450 4,018 9,590 9,094
$2,500
$5,000$5,140
$15,610
Annualgrowth6.5%
5.7$7,500
$10,000
$12,500
$15,000
$17,500
$20,000
$0Age 65 Age 85
$18,110
(2017) (2037)
1,610 2,480
3,0201,970
7,910
550
2,200
2,500Uncertainties (health care inflationvariability, Medicare solvency issues)
Vision, dental & hearing
Medigap Plan F (covers Parts A and Bco-pays and deductibles)
Part D premiums and prescription out-of-pocket costs (may vary widely)
Part B (doctors, tests & outpatienthospital insurance)
1,010
$2,500
$5,000$5,140
$15,610
Annualgrowth6.5%
5.7$7,500
$10,000
$12,500
$15,000
$17,500
$20,000
$0Age 65 Age 85
$18,110
(2017) (2037)
1,610 2,480
3,0201,970
7,910
550
2,200
2,500Uncertainties (health care inflationvariability, Medicare solvency issues)
Vision, dental & hearing
Medigap Plan F (covers Parts A and Bco-pays and deductibles)
Part D premiums and prescription out-of-pocket costs (may vary widely)
Part B (doctors, tests & outpatienthospital insurance)
1,010
RISING ANNUAL HEALTH CARE COSTS IN RETIREMENT 8
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Source: J.P. Morgan Asset Management. Guide to RetirementSM–2017 Edition–Page 26.
BEHAVIOR MATTERS
See pages that follow for additional information
• Your pre-retirement spending pattern may indicate how you will spend money during your retirement years.
• If you’re like many other Americans, your spending in most expense categories will generally decline throughout retirement. However, if you live well into your 80s and 90s, your expenditures may take an upward turn and steadily increase due to health care costs.
• Research shows that your cognitive ability to make sound financial decisions may decline during your retirement years—and you may not even know it.
• Your attitudes and preferences toward investing may help determine which types of retirement income solutions may be best for you.
INCOME SAVVY
9
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WHAT TYPE OF A RETIREMENT SPENDER WILL YOU BE? 10
FOODIES (39% of households)
• Fairly frugal in retirement, with the lowest overall spending
• 28% of expenditures are on food and beverages, including purchases at large box stores or online retailers
• Tend to have lower housing expenditures as they have paid off their mortgage and have limited property taxes
• Tend to spend less as they age
• May need to separately account for health expenditures, but can otherwise reasonably plan for their spending to decrease as they continue through retirement
HOMEBODIES (29% of households)
• Tend to spend more on housing than others
• May still have a mortgage, but even those without mortgages can have significant expenses for property taxes, ongoing maintenance, repairs, furnishings and utilities
• As they age, homebodies may spend more on home maintenance and chores for activities they are no longer able to manage on their own
• May want to consider making clear plans about future housing: When will the mortgage be paid off? Is there a second home that may be sold? What portion of the budget consists of property taxes and utility bills? What are future plans for downsizing or further renovating the home?
Comparison of five different types of retirees and how their spending patterns may differ
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Sources: Wade D. Pfau, Ph.D., CFA, “What Type of Retirement Spender Will You Be?,” Forbes.com, August 18, 2016, based on data from Katherine Roy and Sharon Carson, “Spending in Retirement,” J.P. Morgan Asset Management Retirement Insights, August 20, 2015. Note: Spending analysis represented by 613,000 households who have debit and credit card relationships with Chase Bank and not the entire U.S. population.
WHAT TYPE OF A RETIREMENT SPENDER WILL YOU BE? (continued) 11
GLOBETROTTERS (5% of households)
• Spend more on travel and have the highest overall expenditures of the five different retiree types
• Represent 11% to 13% of households with at least $1 million of investment assets
• Spending does not seem to decline much with age; proportion of globetrotters in the population stays consistent at the age 75+ range, and expenditures on travel are also the highest for this age group
• May want to consider working from the assumption that their retirement spending will keep pace with inflation
HEALTH CARE SPENDERS (4% of households)
• Health care expenditures absorb 28% of income (Medicare-related expenses and prescription costs)
• As health care expenses may rise faster than the overall inflation rate, those who are part of this category should consider taking time to project their health care expenses
SNOWFLAKES (24% of households)
• Snowflakes are unique; households in this category have experiences that cannot be categorized generally
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Sources: Wade D. Pfau, Ph.D., CFA, “What Type of Retirement Spender Will You Be?,” Forbes.com, August 18, 2016, based on data from Katherine Roy and Sharon Carson, “Spending in Retirement,” J.P. Morgan Asset Management Retirement Insights, August 20, 2015. Note: Spending analysis represented by 613,000 households who have debit and credit card relationships with Chase Bank and not the entire U.S. population.
THE GRASSHOPPER VS. THE ANT. WHICH ONE ARE YOU? 12
YOUR CURRENT SPENDING STYLE MAY CONTINUE IN RETIREMENT
In this example, spenders are classified as “Grasshoppers” and savers are classified as “Ants.” It is assumed that retirement begins in the year 2000 for both groups.
Research shows that Grasshoppers typically spend down their assets in retirement much faster than Ants. As shown here, Grasshoppers had only 23% of their wealth in 2000 remaining by 2014, while Ants still had 59% of their wealth in year 2000 remaining.
As you prepare for retirement, determine whether you’re a Grasshopper or an Ant and consider structuring your income strategy accordingly.
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Comparison of wealth in year 2000 remaining during the initial years of retirement
Grasshoppers tend to outspend Ants
Wea
lth re
mai
ning
Source: Guo, Cheng, Browning and Finke, 2016. “Spending in Retirement: Determining the Consumption Gap.” Journal of Financial Planning 29(2): 42–53.Monte Carlo Simulation was used in this analysis. Data was drawn from the Health and Retirement Study (HRS). The sample was limited to retiree respondents between the ages of 65 and 70 in the year 2000.
2006
93%
75%
2004
80%
110%
2002
78%
73%
2010
47%
67%
2012
46%
80%
2014
23%
59%
2008
63%
102%
Ants Grasshoppers
2000
100%
HOW YOUR SPENDING MAY CHANGE DURING RETIREMENT 13
YOU MAY NEED THE MOST INCOME EARLY IN RETIREMENT
It’s often assumed that expenses will remain the same throughout retirement—or possibly even rise due to inflation. However, research shows that expenditures generally decline throughout retirement, so you may need more income shortly after you retire—and less later on.
As you can see illustrated in this table, total expenditures for those age 75+ are 37% less than those age 55-64.
Annual Spending
Age 55-64
Age 65-74
Age 75+
% Change55–75+
Apparel & Services $1,661 $1,265 $807 -51%
Entertainment 3,114 2,850 1,697 -46%
Food & Alcohol 7,814 7,012 5,044 -35%
Healthcare 5,513 6,014 5,967 +8%
Housing 18,647 16,858 14,542 -22%
Transportation 9,727 8,420 4,583 -53%
Miscellaneous & Other 6,510 4,596 4,635 -28%
Personal Insurance & Other 8,360 3,858 1,416 -83%
Total Expenditures $61,346 $50,873 $38,691 -37%
$61,346$50,873
$38,691
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Total annual expenditures by age
Source: U.S. Department of Labor, Bureau of Labor Statistics, Consumer Expenditure Survey, August 2017.
DECLINE IN FINANCIAL LITERACY OVER TIME 14
YOUR JUDGMENT COULD BECOME IMPAIRED OVER TIME—AND YOU MAY NOT EVEN REALIZE IT
Research shows that one’s cognitive ability to make sound financial decisions peaks just before retirement and generally declines thereafter.
Interestingly, one’s confidence level in making sound financial decisions generally remains constant over time.
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Financial literacy score and confidence level in making financial decisions by age
Source: Finke, Howe and Huston, “Old Age and the Decline in Financial Literacy.” Management Science, 2016; DOI: 10.1287/mnsc.2015.2293.
Financial Literacy Confidence
0%
60 65 70 75
Age
80 85
10%
20%
30%
40%
Perc
enta
ge fi
nanc
ial l
itera
cy s
core
50%
60%
70%
80%
90%
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ATTITUDE TOWARD LOSS 15
YOUR COMFORT LEVEL WITH A LOSS MAY CHANGE ONCE YOU RETIRE
How does your response to the key question above compare to the responses of those surveyed?
If you believe you are going to be less comfortable with a loss once you retire, you may want to consider a retirement income solution that can provide you with guaranteed lifetime income—no matter how the market performs.
How comfortable would you feel about accepting a loss after retirement compared to before retirement?
Source: Michael Finke, Ph.D.
61%
20%
12%
6%
1%
Much less comfortable
Slightly less comfortable
No impact
Slightly more comfortable
Much more comfortable
GENERATING RELIABLE INCOME IN RETIREMENT
INCOME SAVVY
• When interest rates are low, it can be more costly to generate income from bonds or stocks.
• You may not be able to count on traditional approaches to generating retirement income, such as the “4% Rule,” in today’s interest rate and stock market environment.*
• Market performance in the early years of retirement can impact how long your savings may last.
• An annuity may be one potential solution for generating the additional guaranteed lifetime income you may want and need to help cover your expenses in retirement.
16
*The 4 Percent Rule is a long-held rule for withdrawing retirement income from an investment portfolio. Based on research pioneered by financial planner William Bengen in 1994, the rule suggested that one could safely take 4% inflation-adjusted withdrawals each year from an investment portfolio of stocks and bonds (50% stocks/50% bonds) without running out of money over a 30-year period.
See pages that follow for additional information
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WHEN INTEREST RATES ARE LOW, BOND RETURNS MAY ALSO BE LOW 17
HOPING FOR HIGHER BOND RETURNS?
History shows that when interest rates are low, bond returns have remained low in the years that follow.
Although past performance does not indicate future results, if you’re hoping returns on bonds will improve soon to help generate more retirement income, you could be disappointed.
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Intermediate-Term Government Bond (ITGB) yield compared to subsequent 5-year bond returns
Source: Morningstar’s Stocks, Bonds, Bills and Inflation dataset, 2017. See page 28 for additional information.
12%
14%
16%
18%
10%
8%
6%
4%
2%
0%1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
ITGB YieldSubsequent 5-Year Bond Returns
Bond
Yie
lds a
nd S
ubse
quen
t 5-Y
ear R
etur
ns
COST TO GENERATE $1,000 OF ANNUAL BOND AND DIVIDEND INCOME 18
TODAY’S LOW RATES AND DIVIDEND YIELDS MAKE INCOME GENERATION MORE EXPENSIVE
When interest rates and dividend yields are low, it may cost more to generate income from a bond or stock investment.
For example, during the period 1975 to 1994, you would have needed $11,680 on average to generate $1,000 of annual income from a bond. More recently, during the period 1995 to 2015, you would have needed $28,767 on average to generate that same $1,000 annual income stream from a bond.
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Cost of $1,000 Bond Income
Cost of $1,000 Dividends
1995–20151975–19941955–1974
Cost of generating income from noted instruments over various time periods
Source: The St. Louis Federal Reserve. See page 28 for additional information.
$60,000
$50,000
$40,000
$30,000
$20,000
$10,000
$0
$11,680
$21,539
$57,219
$25,688$28,811$28,767
THE “4% RULE” HAS BECOME THE “2.8% RULE” 19
ONE LONGSTANDING “RULE” FOR GENERATING INCOME MAY NO LONGER BE VIABLE
If you thought you could count on the “4% Rule” for generating retirement income from your portfolio, you may have to think again.
Research shows that in today’s interest rate and market environment, you may only be able to withdraw 2.8% (adjusted annually for inflation) from a portfolio allocated 50% to stocks and 50% to bonds and have a 90% chance of your income lasting for a 30-year retirement.
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A look at sustainable withdrawal rates in today’s environment
Source: Wade D. Pfau, Ph.D., CFA, www.retirementresearcher.com/dashboard.
Note: The Conservative strategy uses a 25% stock allocation and seeks a 95% chance that the portfolio will not be depleted within 30 years. The Moderate strategy uses a 50% stock allocation and seeks a 90% chance that the portfolio will not be depleted within 30 years. The Aggressive strategy uses a 75% stock allocation and seeks an 80% chance that the portfolio will not be depleted within 30 years. Analysis assumes that withdrawals are made at the start of each year, retirees earn the underlying indexed market returns, and market return simulations are based on capital market assumptions defined at www.retirementresearcher.com/dashboard. See page 28 for additional information.
Sustainable Withdrawal Rates from an investment portfolio over 30 years as of April 2017
Investment Strategy Conservative Moderate Aggressive
Inflation (CPI-U) Adjusted Spending (i.e. “the 4% Rule”)
1.77% 2.82% 4.16%
THE “4% RULE” HAS BECOME THE “2.8% RULE” (continued) 20
2.8% MAY NOT BE ENOUGH TO MEET YOUR INCOME NEEDS
Under the 4% Rule, a lifetime of saving to build a $1,000,000 portfolio creates $40,000 of initial income per year over a 30-year retirement.
Assuming a 2.8% initial annual withdrawal rate, initial income generated is only $28,000.
What’s your strategy for generating reliable income in retirement?
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What does this “rule change” mean for retirement income?
Source: Wade D. Pfau, Ph.D., CFA, www.retirementresearcher.com/dashboard.
Initial annual income based on a $1,000,000 portfolio:
THEN
NOW
4% Rule $40,000
$28,000 30% Less Income!2.8% Rule
MARKET PERFORMANCE CAN IMPACT HOW LONG YOUR SAVINGS MAY LAST
INVESTMENT RETURNS IN THE EARLY YEARS OF RETIREMENT CAN BE DISPROPORTIONATELY POWERFUL
Sequence of returns risk refers to the order in which you encounter positive and negative investment returns—and how such returns may impact your investment and its ability to generate income.
As shown here, the investment return in the first year of retirement accounts for more than 14% of the ultimate success or failure of a retiree’s withdrawal strategy. Sustainable withdrawal rates are disproportionately explained by what happens in the early part of retirement. A market downturn early in retirement can have lasting effects.
21
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A look at sequence of returns risk while you are saving for retirement and once you retire
Source: Wade D. Pfau, Ph.D., CFA, “The Lifetime Sequence of Returns—A Retirement Planning Conundrum,” Journal of Financial Service Professionals, January 2014.See page 28 for additional information.
20%
5%
10%
15%
0%60504030
The first yearof retirement
Years
Retirees are most vulnerable to sequence of returns risk in the initial years of retirement
The
Expl
anat
ory
Pow
er o
f Eac
h Ye
ar’s
Retu
rn
20100
MARKET PERFORMANCE - IMPACT DURING SAVINGS YEARS 22
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The sequence of returns has no impact on the final portfolio value when you are saving. • Three investors made the same initial hypothetical investment of $1,000,000 at age 40 with no additions or
withdrawals.• All had an average return of 7% over 25 years. However, each experienced a different sequences of returns. • At age 65, all had the same portfolio value, although they had experienced different valuations
along the way.
Source: BlackRock. This graphic looks at the effect the sequence of returns can have on your portfolio value over a long period of time. Other factors that may affect the longevity of assets include the investment mix, taxes and expenses related to investing. This is a hypothetical illustration. This illustration assumes a hypothetical initial portfolio balance of $1,000,000 with no additions or withdrawals and the hypothetical sequence of returns noted in the table. These figures are for illustrative purposes only and do not represent any particular investment, nor do they reflect any investment fees, expenses or taxes.
Each five-year sequence is repeated five times and has an average annual return of 7%
Three Unique Return Scenarios
$8,000,000
6,000,000
4,000,000
2,000,000
0
AGE 40 45 5550 60 65
% Yearly Total Returns
Age Mrs. Jones Mr. Smith Mr. Brown41 22 -7 742 15 -4 743 12 12 744 -4 15 745 -7 22 746 22 -7 747 15 -4 748 12 12 749 -4 15 750 -7 22 751 22 -7 752 15 -4 753 12 12 754 -4 15 755 -7 22 756 22 -7 757 15 -4 758 12 12 759 -4 15 760 -7 22 761 22 -7 762 15 -4 763 12 12 764 -4 15 765 -7 22 7Avg.
Return 7% 7% 7%
EndingValue $5,434,372 $5,434,372 $5,434,372
Three Unique Return Scenarios
Mrs. Jones–Favorable Returns in the Early Years Mr. Smith–Bad Returns in the Early Years Mr. Brown–Steady Returns
Data courtesy of BlackRock, Inc.
Mrs. Jones– Favorable Returns in the Early Years
Mr. Smith–Bad Returns in the Early Years
Mr. Brown–Steady Returns
MARKET PERFORMANCE – IMPACT ONCE WITHDRAWALS BEGIN 23
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The sequence of returns can have a critical impact on portfolio value when you are taking withdrawals. • Three investors made the same initial hypothetical investment of $1,000,000 upon retirement at age 65.• All had an average annual return of 7% over 25 years, which followed the same sequences as during the
savings phase.• All made withdrawals of $60,000, adjusted annually for inflation.• At age 90, all had different portfolio values due to annual withdrawals.
Source: BlackRock. This graphic looks at the effect the sequence of returns can have on your portfolio value over a long period of time. Other factors that may affect the longevity of assets include the investment mix, taxes, expenses related to investing and the number of years of retirement funding (life expectancy). This is a hypothetical illustration. This illustration assumes a hypothetical initial portfolio balance of $1,000,000, annual withdrawals of $60,000 adjusted annually by 3% for inflation and the hypothetical sequence of returns noted in the table. These figures are for illustrative purposes only and do not represent any particular investment, nor do they reflect any investment fees, expenses or taxes. When you are withdrawing money from a portfolio, your results can be affected by the sequence of returns even when average return remains the same, due to the compounding effect on the annual account balances and annual withdrawals.
*These sequences of returns are identical to those on the prior page. Mr. White depleted his account at age 88. Had his portfolio not run out, he would have experienced returns of 15% and 22% at ages 89 and 90, respectively, thereby continuing the same sequence of returns.
Three Unique Return Scenarios
Mrs. Doe– Favorable Returns in the Early Years
Mr. White–Bad Returns in the Early Years
Mr. Rush–Steady Returns
$2,000,000
1,000,000
0AGE 65 70 8075 85 90
% Yearly Total Returns
Age Mrs. Doe Mr. White Mr. Rush66 22 -7 767 15 -4 768 12 12 769 -4 15 770 -7 22 771 22 -7 772 15 -4 773 12 12 774 -4 15 775 -7 22 776 22 -7 777 15 -4 778 12 12 779 -4 15 780 -7 22 781 22 -7 782 15 -4 783 12 12 784 -4 15 785 -7 22 786 22 -7 787 15 -4 788 12 12 789 -4 - 790 -7 - 7
EndingValue $1,099,831 $0 $430,323
Three Unique Return Scenarios*
Data courtesy of BlackRock, Inc.
WILL YOU OUTLIVE YOUR RETIREMENT INCOME?
ARE YOU COMFORTABLE ROLLING THE DICE WHEN IT COMES TO YOUR RETIREMENT INCOME?
If your withdrawal rate is too high when generating income from a portfolio of assets, research shows that it lowers the “confidence” level of income lasting over a 30-year retirement.
As shown to the left, assuming a 4% withdrawal rate and a portfolio allocated 60% to stocks and 40% to bonds, there would be a 30-40% chance that your portfolio would fail to provide lasting income over a 30-year retirement.
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Probability that your assets will last throughout your retirement based on various withdrawal rates
The hypothetical table shows the probability that your assets will last through a 30-year retirement, given certain withdrawal rates and stock/bond allocations.Source: BlackRock, 2015. Projections shown above assume the withdrawal in the first year is the stated percent of the original portfolio value. Each year thereafter, the amount withdrawn is adjusted upward 3% to account for inflation. IMPORTANT: This illustration is hypothetical in nature, does not reflect actual investment results and is not a guarantee of future results. See page 28 for additional information.
30-Year PeriodStock/Bond Allocations (%)
20/80 40/60 60/40 80/20 100/0
90-100% 90-100% 90-100% 90-100% 90-100%
90-100% 90-100% 90-100% 90-100% 90-100%
90-100% 90-100% 80-90% 80-90% 80-90%
40-50% 50-60% 60-70% 60-70% 60-70%
0-10% 20-30% 30-40% 40-50% 50-60%
0-10% 0-10% 10-20% 30-40% 30-40%
0-10% 0-10% 0-10% 10-20% 20-30%
0-10% 0-10% 0-10% 0-10% 10-20%
1%
3%
2%
4%
5%
6%
7%
8%
Confidence is very high Confidence is moderate to low
Confidence is moderately high Confidence is very low
Infla
tion-
adju
sted
with
draw
al ra
tes
HOW MUCH OF YOUR RETIREMENT INCOME IS PROTECTED?
SECURE GUARANTEED LIFETIME INCOME FOR A PORTION OF YOUR PORTFOLIO
Social Security benefits were only designed to replace a portion of retiree’s pre-retirement income. They were never intended to be the only source of income when people retire.
If you would like to secure additional guaranteed lifetime income to help cover your expenses in retirement, you may want to consider an annuity.
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In today’s market, many investors are looking for more guarantees to help ensure their income will last throughout retirement
Source: socialsecurity.gov, Fast Facts & Figures About Social Security, 2017 (Data is as of 2015 and based on aggregate total income of couples and nonmarried persons age 65 and older.)See page 29 for additional information about annuities. Be sure to ask your financial professional for complete details about the annuity you may be considering, including limitations and risks. Products may not be available in all states and may vary by state. Contract and optional benefit guarantees are backed by the claims-paying ability of the issuing insurer.
Sources of Retirement
IncomeINVESTMENTS and EMPLOYMENT EARNINGS43%
SOCIAL SECURITY 33%OTHER
4%
PENSION 20%
Income That’s Guaranteed for Life
BENEFITS OF ANNUITIES FOR GUARANTEED LIFETIME INCOME
ANNUITIES OFFER A POWERFUL COMBINATION OF BENEFITS
When it comes to securing reliable income in retirement, an annuity can offer you a number of key benefits, including guaranteed lifetime income for as long as you—or you and your spouse live—depending on your choice of a Single Life or Joint Life income option.
Ask your financial professional if an annuity may be an appropriate solution for your retirement income needs.
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A look at the different types of annuities and several key benefits
See page 29 for additional information about annuities. Be sure to ask your financial professional for complete details about the annuity you may be considering, including limitations and risks. Products may not be available in all states or may vary by state. Contract and benefit guarantees are backed by the claims-paying ability of the issuing insurer.
* Available through the optional income benefit or annuitization (at no cost)** Available through annuitization only.
*** If the contract is annuitized, you may no longer access principal.
VariableAnnuities
IndexAnnuities
FixedAnnuities
ImmediateAnnuities
Deferred Income
Annuities
Guaranteed lifetime income
Income with growth potential
Increase options
available
Increase options
available
Access to principal (withdrawal
charges may apply)
(withdrawal charges and
MVA may apply)
(withdrawal charges and
MVA may apply)
No No
Market participation
No, but they provide potential for interest
to be credited based in part on the
performance of a specified index
No No No
*** *** ***
** * ** **
GENERATING INCOME FROM YOUR SAVINGS AND INVESTMENTS
LOOKING FOR ADDITIONAL GUARANTEED LIFETIME INCOME?
If you are facing an income gap, that is, you don’t have enough income from guaranteed sources (such as Social Security or a pension) to cover your essential lifestyle expenses in retirement, you may want to consider purchasing an annuity.
You can use the table to the left with the help of your financial professional to determine how much money you would need to allocate to an annuity to generate a specified amount of annual income.
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Amount of money needed to cover an income gap assuming different initial withdrawal rates
Annuity income protection features may be standard or optional. Additional fees, withdrawal parameters, age restrictions, and other limitations apply. With certain variable annuities, investment requirements may also apply. To realize the benefits of an income protection feature, you will need to take withdrawals within certain parameters. With certain variable annuity income protection features and income options, the amount available for lifetime income will be reduced if the contract value is completely depleted due to market volatility and/or withdrawals taken within the feature’s parameters. Depending on the performance of your annuity and your income needs, you may never need to rely on the protection provided by an income protection feature. Please see a product brochure or prospectus for complete details about the annuity you may be considering, including limitations and risks. See page 29 for additional information about annuities.
Essential Lifestyle Expenses are the needs of daily living and maintaining the lifestyle you desire, such as the cost of your home, food, clothing, transportation, and health care-related expenses. Of course, an annuity may also be used to generate income to help cover discretionary lifestyle expenses.
Your Essential Lifestyle
Income Gap
Your Initial Withdrawal Rate
3% 4% 5% 6% 7%
$10,000 $333,334 $250,000 $200,000 $166,667 $142,858
$20,000 $666,667 $500,000 $400,000 $333,334 $285,715
$30,000 $1,000,000 $750,000 $600,000 $500,000 $428,572
$40,000 $1,333,334 $1,000,000 $800,000 $666,667 $571,429
$50,000 $1,666,667 $1,250,000 $1,000,000 $833,334 $714,286
ADDITIONAL INFORMATION 28
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• “When interest rates are low, bond returns may also be low”: Government bonds are subject to interest rate risk, but they are backed by the U.S. Government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. Interest from U.S. Government bonds is exempt from state and local taxes, but may be subject to federal income tax. Annuity guarantees are backed by the claims-paying ability of the issuing insurance company. An investment in a variable annuity is subject to risk, including possible loss of principal. The contract, when redeemed, may be worth more or less than the total amount invested. Withdrawals of taxable amounts are subject to ordinary income tax and, if taken prior to age 59½, an additional 10% federal tax may apply.
• “Cost to generate $1,000 of annual bond and dividend income”: Government bonds are subject to interest rate risk, but they are backed by the U.S. Government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. Interest from U.S. Government bonds is exempt from state and local taxes, but may be subject to federal income tax. Dividend-paying stocks can provide a tax advantage. Qualified dividends are currently taxed at the lower, long-term capital gains rate rather than at the higher rate for an individual’s ordinary income.
• “The 4% Rule” has become the “2.8% Rule” – Note Regarding Capital Market Assumptions: Expectations used connect the historical averages from Robert Shiller’s dataset with the current values for inflation and interest rates. This makes allowances for the fact that interest rates and inflation are currently far from their historical averages (which is particularly important for retirees because of sequence risk–early returns matter disproportionately), but it also respects historical averages and does not force returns to remain low for the entire retirement period.
• “Market performance can impact how long your savings may last”: The chart shown attempts to illustrate more clearly how sequence of returns risk impacts both the accumulation and distribution phases. It is based on simple regressions which determine how much of the outcome (wealth accumulation or sustainable withdrawal rate) can be explained by the returns experienced in each year of the life cycle. The chart isolates the impact of each year’s return on lifetime outcomes using a sample of 100,000 Monte Carlo simulations. For the first 30 years when individuals are saving, the percentage of the final wealth accumulation at the retirement date that can be explained by each annual investment return grows from year 1 through year 30. With wealth accumulations so low in the early part of one’s career, the early returns have very little impact on the absolute level of wealth accumulated at the end of the savings period. But as retirement approaches, a given percentage return produces an increasing impact on the final wealth value in absolute terms, leaving individuals particularly vulnerable to these later returns. As for years 31-60, the individual has entered the distribution or retirement phase, and the chart shows the impact of each year’s return on the maximum sustainable withdrawal rate experienced by retirees. The return in year 31 represents the first year of retirement, and the result in this first year explains more than 14 percent of the final outcome for retirees.
• “Will you outlive your retirement income?”: Probabilistic (Monte Carlo) modeling is used in this illustration. Underlying each scenario presented in this analysis are certain capital market assumptions (e.g., rates of return, volatility as measured by standard deviation, correlation between asset classes). These are forward-looking rates of return developed by BlackRock. The capital market assumptions regarding rates of return for various asset classes and the probability analysis applied to these returns are key to the underlying results. In this analysis, stocks have an expected return of 7.25% and a standard deviation of 17% while bonds have an expected return of 3% and a standard deviation of 4.5%. Other investments not considered may have characteristics similar or superior to those being analyzed. There is no guarantee that actual future market returns will be consistent with these assumptions and limitations.
ADDITIONAL INFORMATION (continued) 29
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• “Benefits of annuities for guaranteed lifetime income”/”Generating income from your savings and investments”: • Annuities: Annuities are long-term financial products designed for retirement purposes. In the Accumulation phase, they can help you build
assets on a tax-deferred basis. In the Income phase, they can provide you with guaranteed income through standard or optional features. You can annuitize your contract and receive lifetime income payments for no additional cost if you choose a lifetime annuity option or you may choose an optional income protection benefit. Certain variable annuities, index annuities and fixed annuities offer income protection benefits, which are subject to additional fees, age restrictions, withdrawal parameters and other limitations. With variable annuities, these types of benefits are optional and investment requirements also apply. Early withdrawals may be subject to withdrawal charges and a Market Value Adjustment (MVA) may also apply to certain fixed annuities. Partial withdrawals may reduce benefits available under the contract, as well as the amount available upon a full surrender. Withdrawals of taxable amounts are subject to ordinary income tax and, if taken prior to age 59½, an additional 10% federal tax may apply. Keep in mind, for retirement plans and accounts (such as IRAs and 401(k)s), an annuity provides no additional tax-deferred benefit beyond that provided by the retirement plan or account itself.
• Variable annuities: Variable annuities offer professional money management, along with insurance features (such as a guaranteed death benefit and annuity income options) that you pay for through what is called a separate account fee. Variable annuities are subject to additional fees, including a contract maintenance fee, expenses related to the operation of the variable portfolios, and the costs associated with any optional features, if elected. Early withdrawal charges may apply. Partial withdrawals may reduce benefits available under the contract as well as the amount available upon a full surrender. An investment in a variable annuity is subject to risk, including the possible loss of principal. The contract, when redeemed, may be worth more or less than the total amount invested.
• Index annuities: Index annuities are not a direct investment in the stock market. They are long-term insurance products with guarantees backed by the claims-paying ability of the issuing insurance company. They provide the potential for interest to be credited based in part on the performance of the specified index, without the risk of loss of premium due to market downturns or fluctuations. Index annuities may not be suitable for all individuals.
• Fixed annuities: Fixed annuities offer a rate of return guaranteed by the insurance company. Although not all fixed annuities offer income protection benefits, most offer a range of income options through annuitization, including the opportunity for guaranteed lifetime income.
• Immediate annuities and deferred income annuities: These types of annuities offer a range of income options, including the opportunity for guaranteed lifetime income. These types of annuities permanently convert principal into a guaranteed income stream.
ADDITIONAL INFORMATION (continued) 30
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Not FDIC or NCUA/NCUSIF Insured
May Lose Value • No Bank or Credit Union Guarantee Not a Deposit • Not Insured by any Federal Government Agency
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Variable annuities are sold by prospectus only. The prospectus contains the investment objectives, risks, fees, charges, expenses and other information regarding the contract and underlying funds, which should be considered carefully before investing. Please contact your insurance and securities licensed financial professional or call 1-800-445-7862 to obtain a prospectus. Please read the prospectus carefully before investing.All contract and optional benefit guarantees, including any fixed account crediting rates or annuity rates, are backed by the claims-paying ability of the issuing insurance company. They are not backed by the broker/dealer from which this annuity is purchased.
This material was prepared to support the marketing of annuities issued by American General Life Insurance Company (AGL) and The United States Life Insurance Company in the City of New York (US Life). Please keep in mind AGL, US Life, and their distributors and representatives may not give tax, accounting or legal advice. Any tax statements in this material are not intended to suggest the avoidance of U.S. federal, state or local tax penalties. Such discussions generally are based upon the company’s understanding of current tax rules and interpretations. Tax laws are subject to legislative modification, and while many such modifications will have only a prospective application, it is important to recognize that a change could have retroactive effect as well. Please seek the advice of an independent tax advisor or attorney for more complete information concerning your particular circumstances and tax statements made in this material.
Products and features may vary by state and may not be available in all states. The purchase of an annuity is not required for, and is not a term of, the provision of any banking service or activity.
Annuities are issued by American General Life Insurance Company (AGL) except in New York, where they are issued by The United States Life Insurance Company in the City of New York (US Life). Variable annuities are distributed by AIG Capital Services, Inc. (ACS), Member FINRA, 21650 Oxnard Street, Suite 750, Woodland Hills, CA 91367-4997, 1-800-445-7862. AGL, US Life and ACS are members of American International Group, Inc. (AIG).