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Retirement PlanningRetirement PlanningBy: Lyle K. Benson, Jr., CPA, PFS, CFPBy: Lyle K. Benson, Jr., CPA, PFS, CFP

L.K. Benson & Company, P.CL.K. Benson & Company, P.C

Chesapeake Tax ConferenceChesapeake Tax Conference

MACPAMACPA

September 17, 2009September 17, 2009

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The Changing Definition The Changing Definition of Retirementof Retirement

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One baby boomer will turn One baby boomer will turn 59 1/2 every seven 59 1/2 every seven seconds between now seconds between now and 2025. and 2025.

THE AGE WAVE IS COMING ASHORE!

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Life Expectancy at Birth

61.4

70.3

75.8

78.4

50

55

60

65

70

75

80

1935 1965 1995 2025

Year of Birth

Age at

Death

Our Life Expectancy is LONGER

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Probability of a 65-year-old living to Probability of a 65-year-old living to various agesvarious ages

0%

25%

50%

75%

100%

65 70 75 80 85 90 95 100 105

MaleFemaleAt least one spouse

Age

78 81 86

85 88 91

91 93 96

Pro

bab

ility

Source: Annuity 2000 Mortality Tables

86

91

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BOOMERS REJECTINGBOOMERS REJECTING ““RETIREMENTRETIREMENT””

DESIRE TO STAY MENTALLY ACTIVEDESIRE TO STAY MENTALLY ACTIVE DESIRE TO STAY PHYSCIALLY ACTIVEDESIRE TO STAY PHYSCIALLY ACTIVE DESIRE TO REMAIN PRODUCTIVE DESIRE TO REMAIN PRODUCTIVE

AND USEFULAND USEFUL Nobody says “I WANT TO CONTINUE Nobody says “I WANT TO CONTINUE

TO WORK SO I CAN AFFORD TO FEED TO WORK SO I CAN AFFORD TO FEED MYSELF,” even if that’s true.MYSELF,” even if that’s true.

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2007 Gallup Annual 2007 Gallup Annual Personal Finance PollPersonal Finance Poll

78% will work part-time after they 78% will work part-time after they “retire”“retire” 21% Major Source of Income21% Major Source of Income 52% Minor Source52% Minor Source

57% will fully retire after 6557% will fully retire after 65 49% Say they Want to Work49% Say they Want to Work 49% Say they Don’t Want to Work 49% Say they Don’t Want to Work

but Willbut Will

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THE BOOMER FINANCIAL WANTS/NEEDSTHE BOOMER FINANCIAL WANTS/NEEDS

DEBT FREEDEBT FREE DEPENDENT FREEDEPENDENT FREE DISTRIBUTION (CASH FLOW) NOT DISTRIBUTION (CASH FLOW) NOT

ACCUMULATIONACCUMULATION INFLATION (REAL CASH FLOW)INFLATION (REAL CASH FLOW) NEXT CAREER OPTIONSNEXT CAREER OPTIONS

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Market VolatilityMarket Volatility

Retirement is being impacted Retirement is being impacted Changes in family cash flowChanges in family cash flow Education funding is being Education funding is being

impacted impacted Gifting and wealth transfer Gifting and wealth transfer

strategiesstrategies Restructure debt Restructure debt

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Drawdown Studies and Drawdown Studies and ThoughtsThoughts

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Mechanics of Drawdown StudiesMechanics of Drawdown Studies

““Initial Withdrawal Rate” (IWR) – The Initial Withdrawal Rate” (IWR) – The percentage of the portfolio withdrawn in percentage of the portfolio withdrawn in the first year. the first year. Safe – Highest IWR that guarantees the Safe – Highest IWR that guarantees the

required portfolio longevity.; 4-4.5%required portfolio longevity.; 4-4.5% Practical – IWR that anticipates modest Practical – IWR that anticipates modest

failure(10% or less); 5%failure(10% or less); 5% Simulation SoftwareSimulation Software

Monte Carlo SimulationsMonte Carlo Simulations Limited database of return numbersLimited database of return numbers

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Higher IWR can be tolerated when:Higher IWR can be tolerated when:

Discretionary share of spending is highDiscretionary share of spending is high Fixed income with COLAs as share of total Fixed income with COLAs as share of total

resources is highresources is high Personal Inflation rate is below CPIPersonal Inflation rate is below CPI Risk management coverage is adequate Risk management coverage is adequate

and have inflation protectionand have inflation protection Fixed income or other sources commence Fixed income or other sources commence

after start of projection periodafter start of projection period Expenditures drop off after start of Expenditures drop off after start of

projectionprojection

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Drawdown SummaryDrawdown Summary Drawdown should include portfolio, tax, Drawdown should include portfolio, tax,

withdrawal and longevity strategieswithdrawal and longevity strategies Drawdown studies provide insight into Drawdown studies provide insight into

these strategies but should only be these strategies but should only be used as rules of thumbused as rules of thumb

Individual withdrawal strategies should Individual withdrawal strategies should personalize spending behavior and personalize spending behavior and coordinate with set aside reserves, tax coordinate with set aside reserves, tax management and the IWRmanagement and the IWR

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Impact of InflationImpact of Inflation

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Return AssumptionsReturn Assumptions

What kind of returns can we expect? What kind of returns can we expect? Historical numbers often don’t go Historical numbers often don’t go

back very far for some asset classes.back very far for some asset classes. How do we account for years like How do we account for years like

2008?2008? Could depend on the client and how Could depend on the client and how

conservative they’d like to be.conservative they’d like to be.

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ConclusionsConclusions CPA’s are uniquely positioned to give good CPA’s are uniquely positioned to give good

financial advice to clients.financial advice to clients. People are changing their ideas and outlooks for People are changing their ideas and outlooks for

retirement.retirement. We need to keep in touch with our clients in tough We need to keep in touch with our clients in tough

economic times like these.economic times like these. It is important to understand drawdown rates and It is important to understand drawdown rates and

to establish one that works for each individual to establish one that works for each individual scenario.scenario.

Inflation is something that cannot be ignored when Inflation is something that cannot be ignored when planning for retirement needs.planning for retirement needs.

There are many tax planning techniques that can There are many tax planning techniques that can be utilized in retirement planningbe utilized in retirement planning