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Shifting Gears

Considerations and Strategies for Pre-Retirees

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What’s ahead?

Shifting Gears

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• Your retirement

• Savings

• Social Security

• Retirement income strategies

Think about:

Shifting Gears

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Navigate the road ahead

Shifting Gears

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Longevity

Inflation

Health care costs

Investment risks

Public policy5

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Time To Shift Gears

Shifting Gears

Road bumps Longevity and Inflation

• Average life expectancy 78+ years1.

• 55 percent chance one spouse will live to 922.

• 30 years of income = $1.5M without inflation!3

• Income needs may double in 30 years4.

1 Centers for Disease Control, Deaths, Preliminary Data for 2011.2 For couple at age 65. 2012 IAM Basic Mortality table.3 Assuming an 85 percent replacement ratio for a current salary of $40,000 over 30 years. Does not account for inflation or investment return. 4 Assuming inflation averages 2.5 percent a year.

Amounts shown do not reflect the impact of taxes on pre-tax distributions. Individual taxpayer circumstances may vary. Examples are for illustrative purposes only.

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Time To Shift Gears

Shifting Gears

Road bumps Health care costs

• Couple may need $207,000 for out-of-pocket

healthcare costs1.

• Additional costs for long-term care, assisted living.

• Keep in mind Medicare eligibility at age 65.

1 Savings needed for Medigap premiums, Medicare Part B and Part D premiums and out-of-pocket prescription drug expenses. Assumes median drug expenses and excludes long-term care. Employee Benefit Research Institute, October 2013, http://www.ebri.org/pdf/notespdf/ebri.notes.oct13.retsvgs1.pdf.

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Time To Shift Gears

Shifting Gears

Road bumps Investment risks and public policy

No investment strategy, such as asset allocation or diversification, can guarantee a profit or protect against loss in periods of declining values. Individual taxpayer circumstances may vary. Examples are for illustrative purposes only.

• Ups and downs are inevitable.

• Diversify investments to balance risk and return.

• Changes to taxes and public programs are out of

your control.

• Create a strategy for your personal situation.

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• Wants

• Needs

• Sources of income

Plan Your Retirement

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• Travel?

• Volunteer?

• Start a business?

• Pursue a hobby?

• School?

What are your

retirement dreams?


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• Mortgage or rent?

• Doctor and medical bills?

• Groceries and eating out?

• Insurance?

• Car payments?

• Entertainment?

• Credit card payments?

What do you NEED

in your retirement?

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SAVINGS

RETIREMENT

PLANS

OTHER?

SOCIAL

SECURITY

RENTAL

PROPERTIES

PENSIONS

SOURCES

OF INCOME

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Shift savings strategy into high gear


• Consolidate retirement

accounts

• Multiple types of savings

• Save more

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The impact of catch-up contributions


These examples are for illustrative purposes only. They assume a $100,000 starting balance contributions made for eight years from age 57 to 65 and a 7 percent annual rate of return. The $24,000 contribution, including the IRS maximum contribution of $18,000 plus a catch-up contribution of $6,000, is for illustrative purposes. The IRS contribution limits are indexed and may be adjusted annually. The assumed rate of return is hypothetical and does not guarantee any future returns nor represent the return of any particular investment options.

CATCH-UP CONTRIBUTIONS

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Social Security Benefits

• Impact on income

• Timing

• Working while collecting

• Taxation of benefits

• Options for married couples

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Sources of retirement income

for average income earners

to replace 85% – 100% of

pre-retirement income.

Time To Shift GearsSocial Security Benefits

Impact of Social Security

Employer-Sponsored

Retirement Plan,

Personal Savings and

Other Sources

Social Security

Assumes 85 to 100 percent replacement ratio with 40 percent replacement from Social Security for worker earning $40,000 a year prior to retirement.

40%

45-60%

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Highest monthly

paycheck

No penalty for

employment

Receive

benefits later

Receive

benefits earlier

Smallest monthly

check

Potential reduction

penalty for

employment

Higher monthly

check

No penalty for

employment

No interim

benefits


When to retire?

66-67

YOUR AGE AND YOUR BENEFIT

7062

PROS

AGE

CONS

Source: Social Security Administration, www.ssa.gov.

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Working while collecting

1 At FRA, your benefit amount is adjusted to accommodate for the earlier reduction. Source: Social Security Administration, www.socialsecurity.gov/hlp/isba/10/hlp-isba061-aet4.htm.

AGE2015 EMPLOYMENT

INCOME LIMITSCONSIDERATIONS

Under Full Retirement

Age (FRA) $15,720

For every $2 you earn over the

limit, $1 is withheld from your

Social Security benefits until the

month in which FRA is reached.

In the year FRA is

reached$41,880

For every $3 you earn over the

limit, $1 is withheld from your

Social Security befits until the

month in which FRA is reached.

At FRA or older1 No limits on earnings None

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SINGLE

Provisional

Income

Benefit Subject

to Tax

Under $25,000 0%

$25,000 – $34,000 Up to 50%

Over $34,000 Up to 85%

MARRIED FILING JOINTLY

Provisional

Income

Benefit Subject

to Tax

Under $32,000 0%

$32,000 – $44,000 Up to 50%

Over $44,000 Up to 85%


Social Security and taxes

Note: State and local taxes may differ.

Source: SSA Publication No. 05-10035, September 2011, Your Benefits May Be Taxable, http://www.ssa.gov/pubs/10035.html.

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Considerations for married couples

• When should each

spouse claim?

• Personal benefit or

spousal benefit?

• Will survivor’s benefit

be enough?

• Other strategies?

Source: SSA Publication No. 05-10035, September 2011, Family Benefits, http://www.ssa.gov/pubs/10035.html.

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SOCIAL SECURITY

STRATEGYDEFINITION BENEFIT

Claim and

Suspend

Individual at FRA (typically higher

wage earner) claims then

suspends personal benefit,

allowing spouse, also at FRA, to

claim Spousal Benefit.

Allows spouse to claim Spousal

Benefit, while the higher wage

earner can continue to accrue

benefits. Can increase the overall

lifetime benefits.

Claim Now,

Claim More Later

An individual at FRA may claim a

Spousal Benefit, delay taking

their own benefit.1

Can earn delayed credits to claim

higher personal benefit at a later

age, which may also help spouse

receive greater survivor benefit.

Other strategies

1 Benefit will be reduced if not at Full Retirement Age. Both individuals must have filed for Social Security benefits. Source: Social Security Administration, http://www.socialsecurity.gov/retire2/applying6.htm#options.

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Time To Shift Gears

Request an estimate


WWW.SSA.GOV/ESTIMATOR

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Chart your Social Security strategy

• Obtain your benefit estimate at www.ssa.gov/estimator.

• Plan to apply for benefit three months prior to needing

Social Security income.

• Visit with your financial professional.


http://www.ssa.gov/estimator

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Shift From Savings Strategies to

Retirement Income Strategies

• How to cover expenses?

• What to do with savings?

• Consider types of income.

• Take action to create income.

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GUARANTEED INCOME

• Social Security

• Company pensions

• Annuities

• Any wages earned in

retirement

NEEDS

• Food

• Clothing

• Shelter

• Health care

• Transportation

• Income taxes

COVER NEEDS

VARIABLE INCOME SOURCES

• Retirement plans [401(k),

403(b), ESOP] and IRAs

• Personal savings (CDs,

bank accounts, money

market accounts)

• Investments (stocks, bonds,

mutual funds, real estate)

WANTS

• Hobbies/leisure

• Travel

• Entertainment

• Club memberships

• Gifts/charitable donations

COVER WANTS

Retirement Income

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• Keep savings in

retirement plan.

• Roll all or part to an IRA.

• Consider other savings

or investment options.

• Cash out.

What to do with

retirement plan savings?

Retirement Income

You should consider the differences in investment options, fees and expenses, and tax and legal implications (creditor protections and required minimum distributions) when evaluating your choices. An IRA, like a qualified employer-sponsored plan, will have associated fees and expenses, which will be different for each option available to you. You should consult with a tax professional about the tax implications of each option.

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• Simplicity.

• Consolidation of multiple accounts.

• Continued access to plan’s investment options

and services.

• No early withdrawal penalty after age 55, if

separated from service at age 55 or older.

• Allows you to defer tax burden of cash-out.

Benefits of the plan

Retirement Income


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• Investment choice and flexible access to

retirement funds.

• Consolidation of multiple retirement accounts.

• No early withdrawal penalty after age 59½.

• Allows you to defer the tax burden of cash-out.

IRA considerations

Retirement Income


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• Mutual funds

• Annuities

• Bank products

Other types of savings/

investment options

Retirement Income


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• Large tax burden.

• There are other options.

Why not cash out?

Retirement Income

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Types of income

Retirement Income

GUARANTEED INCOME VARIABLE INCOME

Products can supplement guaranteed

income from Social Security, other

sources

Predictable income over time –

even a long period of time

Protection from market volatility

Investment options/choice not the focus

Also a supplement to guaranteed

income sources

Variable instead of “guaranteed”

because amounts may vary

Investment control and options

Flexibility in amounts you withdraw

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• Income annuity (single premium immediate

annuity).

• Deferred annuity with guaranteed living benefits.

Guaranteed income sources

Retirement Income

Guarantees are based on the claims-paying ability of the issuing insurance company.

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• Withdrawals from retirement accounts.

• Dividends from income generating mutual funds.

• Interest from bank products like CDs.

• Deferred annuities without guaranteed living

benefits.

Variable income sources

Retirement Income

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ANNUITIES

BANK

SOLUTIONS

(FDIC Insured)

Maximize Savings Potential Help Reduce Volatility Optimize Income Potential

* An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund.

Q

Next steps in creating income

Retirement Income

Variable annuities Fixed annuities

Income annuities

Variable annuities with

guaranteed living benefits

Long-term certificates

of deposit (CDs)

Money market accounts

Savings accounts

CDs

CD laddering

MUTUAL

FUNDS

Equity funds

Equity focused target-

date/risk funds

Short-term

fixed-income funds

Money market funds*

Fixed-income funds

Short-term

fixed-income funds

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Shift into aretirement income strategy

• Call your financial professional to schedule a

personal visit.

Retirement Income

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What’s Next?

• Consider increasing retirement plan contribution,

consolidating retirement savings.

• Get an estimate of Social Security benefits.

• Think about options for retirement income.

• Schedule a 1 on 1 meeting with your financial

professional.

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These are only general guidelines, which may be helpful in making personal financial decisions. Responsibility for these decisions is assumed by you, not the Principal Financial Group or any of its member companies.

The subject matter in this communication is provided with the understanding that The Principal® is not rendering legal, accounting, or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements.

Investing involves risk, including possible loss of principal.

Principal Funds are distributed by Principal Funds Distributor, Inc.

MM7804 | 05/2015 | t1505080450

©2015 Principal Financial Services, Inc.

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