Managing Your Retirement Income
(C) 2006, National Association of Variable Annuities and the International Foundation for Retirement Education. All rights reserved. 1
Managing Your Retirement Income
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
Managing Your Retirement Income
(C) 2006, National Association of Variable Annuities and the International Foundation for Retirement Education. All rights reserved. 2
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
Managing Your Retirement Income
(C) 2006, National Association of Variable Annuities and the International Foundation for Retirement Education. All rights reserved. 3
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.
Managing Your Retirement Income
(C) 2006, National Association of Variable Annuities and the International Foundation for Retirement Education. All rights reserved. 4
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
Managing Your Retirement Income
(C) 2006, National Association of Variable Annuities and the International Foundation for Retirement Education. All rights reserved. 5
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.
Managing Your Retirement Income
(C) 2006, National Association of Variable Annuities and the International Foundation for Retirement Education. All rights reserved. 6
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
Managing Your Retirement Income
(C) 2006, National Association of Variable Annuities and the International Foundation for Retirement Education. All rights reserved. 7
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
Managing Your Retirement Income
(C) 2006, National Association of Variable Annuities and the International Foundation for Retirement Education. All rights reserved. 8
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
Managing Your Retirement Income
(C) 2006, National Association of Variable Annuities and the International Foundation for Retirement Education. All rights reserved. 9
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
Managing Your Retirement Income
(C) 2006, National Association of Variable Annuities and the International Foundation for Retirement Education. All rights reserved. 10
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
Managing Your Retirement Income
(C) 2006, National Association of Variable Annuities and the International Foundation for Retirement Education. All rights reserved. 11
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
Managing Your Retirement Income
(C) 2006, National Association of Variable Annuities and the International Foundation for Retirement Education. All rights reserved. 12
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?
Managing Your Retirement Income
(C) 2006, National Association of Variable Annuities and the International Foundation for Retirement Education. All rights reserved. 13
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?
Managing Your Retirement Income
(C) 2006, National Association of Variable Annuities and the International Foundation for Retirement Education. All rights reserved. 14
Essential Expenses Discretionary Spending
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?
Managing Your Retirement Income
(C) 2006, National Association of Variable Annuities and the International Foundation for Retirement Education. All rights reserved. 15
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
Managing Your Retirement Income
(C) 2006, National Association of Variable Annuities and the International Foundation for Retirement Education. All rights reserved. 16
– 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?
$$$
$
Managing Your Retirement Income
(C) 2006, National Association of Variable Annuities and the International Foundation for Retirement Education. All rights reserved. 17
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
Managing Your Retirement Income
(C) 2006, National Association of Variable Annuities and the International Foundation for Retirement Education. All rights reserved. 18
– 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”
Managing Your Retirement Income
(C) 2006, National Association of Variable Annuities and the International Foundation for Retirement Education. All rights reserved. 19
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
Managing Your Retirement Income
(C) 2006, National Association of Variable Annuities and the International Foundation for Retirement Education. All rights reserved. 20
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
Retirement income option #4: Combinelifetime income and a SWP
Managing Your Retirement Income
(C) 2006, National Association of Variable Annuities and the International Foundation for Retirement Education. All rights reserved. 21
SWP: 5% initial withdrawal 4% inflation annually, Annuity: www.immediateannuities.com, Life only annuity, male, state of Illinois
Retirement income option #4: Combinelifetime income and a SWP
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
Managing Your Retirement Income
(C) 2006, National Association of Variable Annuities and the International Foundation for Retirement Education. All rights reserved. 22
Essential Expenses Discretionary Spending
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
Managing Your Retirement Income
(C) 2006, National Association of Variable Annuities and the International Foundation for Retirement Education. All rights reserved. 23
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
Managing Your Retirement Income
(C) 2006, National Association of Variable Annuities and the International Foundation for Retirement Education. All rights reserved. 24
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