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Retirement Income Planning
Presented by:
Edward J. Barrett CFP®, ChFC®, CLU, CEBS®, RPA, CRPS®, CRPC®, CPFA
Founder, President & CEO
1-800-345-5669 www.brokered.net
BEST MONTHLY WEBINAR
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Continuing Education
• Live Webinar approved for 1-Hour of CE credit: CFP
®, CIMA® /CPWA®.
o BEST will report the completed credit on your behalf (50
minutes)
• Monthly Live Webinar Series
o May 29, 2018: Planning with IRAs
• BEST: 1-800-345-5669
• Email: [email protected]
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Disclaimer
• The information and/or the materials provided as part of this
program are intended and provided solely for informational and
educational purposes. None of the information and/or materials
provided as part of this power point or ancillary materials are
intended to be, nor should they be construed to be, the basis of
any investment, legal, tax or other professional advice. Under no
circumstances should the audio, power point or other materials
be considered to be, or used as, independent legal, tax,
investment or other professional advice. The discussions are
general in nature and not person specific. Laws vary by state and
are subject to constant change. Economic developments could
dramatically alter the illustrations or recommendations offered in
the program or materials.
3
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Agenda
• Retirement Planning Overview
• Designing a Retirement Income
Plan
• Sources of Retirement Income
• Risks in Retirement Income
Planning
• Retirement Income Strategies
4
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Overview of Retirement Planning
• What is retirement planning?
o “The process of determining retirement
income goals and the actions and
decisions necessary to achieve those
goals.”₁
• An exercise in balancing assets and
cash flow over the retirement period.
• Accumulation vs. Distribution
o “Distribution Engineer”
5
Source: ¹Investoppedia; ₂ Society of Actuaries, “2017 Risks and Process of Retirement Survey;
https://www.soa.org/research-reports/2018/retirement-risk-survey/
The Hoover Dam
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The Five Step Retirement Plan Process
• The Discovery Process: Define goals and
objectives (client centered/listen)
• Gather Data (establish a detailed budget)
and Develop a Retirement Income Plan
• Analyze the Data and Set the Strategy
• Implement the Plan
• Monitor and Updating the Plan
6
“The first step in designing a retirement plan is to
design a retirement plan that is foolproof.”¹
Source: Jim C. Otar, Unveiling the Retirement Myth, Advanced Retirement
Planning based on Market History, (2009).
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Importance of Planning for Retirement
Study by LIMRA Secure Retirement Institute, reported that pre-retirees and retirees (ages 55-75 with financial
assets of $100,000+) only 16 percent have a formal written retirement plan. Remember the saying : People
don’t plan to fail, they fail to plan. *Results based on pre-retirees.
Source: The Benefits of Retirement Planning, LIMRA Secure Retirement Institute (2016);
https://www.lifehealth.com/benefits-formal-written-retirement-plans/.
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Retirement Income Plan
• The most important part of a comprehensive
(holistic) retirement plan:
o Determine retirement income needs: match
expenses to income (“lifestyle”);
o Understand the risk factors affecting retirement
income;
o How and when to make withdrawal (spending)
choices; and
o Appropriate allocations and diversification of
the investment portfolio.
8
“Eighty-one percent of Americans say they don’t know how much
money they’ll need to fund their retirement.” ₁
Source: ₁Age Wave/Merrill Lynch (2017)
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Determining Retirement Income Needs
• Methods used:
o The Income Replacement Ratio (IRR)
Method; and
o The Actual (Adjusting) Expense Method
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The Income Replacement Ratio Method
• The IRR method uses a person’s income after retirement divided
by his or her gross income before retirement.
o The average American needs between 75% and 85% of their pre-
retirement income, based on assumptions that spending declines in
retirement.¹
• It is important to remember that the income replacement ratios
are based on what “average” people are expected to need at
retirement to maintain their pre-retirement standard of living
(lifestyle).
• The appeal of this approach is it’s simplicity.
10
Source: ¹Aon Consulting’s and Georgia State 2008 Replacement Ratio Study™;
http://www.aon.com/about-aon/intellectual-capital/attachments/human-capital-consulting/RRStudy070308.pdf.
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IRR Methodology
11
Source: J.P. Morgan Asset Management analysis, 2017. Household income replacement rates are derived from an inflation-adjusted
analysis of: Consumer Expenditure Survey (BLS) data (2013-2016); Social Security benefits using modified scaled earnings in 2017
for a single wage earner at age 65 and a spousal benefit at age 62 reduced by Medicare Part B premiums; and 2017 OASDI and FICA
taxes. The income replacement needs may be lower for households in which both spouses are working and the second spouse’s
individual benefits are greater than their spousal benefit. Single household income replacement needs may vary as spending is typically
less than a two-spouse household; however, the loss of the Social Security spousal benefit may offset the spending reduction.
Percentages and values may not sum due to rounding.
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Consumer Expenditure Survey *
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Average Annual Expenditures for Different Age Group s, 2015
Expenses 55-64 65-74 75+
Housing $18,188 $16,465 $14,253
Transportation $10,024 $8,028 $5,228
Food $6,992 $6,214 $4,561
Health care $5,112 $5,715 $5,814
Apparel and services $1,596 $1,331 $698
Entertainment $3,323 $3,005 $1,728
Pensions and Social Security $7,181 $3,289 $1,182
Other¹ $6,365 $5,430 $4,659
Total Annual Expenditures $58,781 $49,477 $38,123
Source: *U.S. Bureau of Labor Statistics, Consumer Expenditure Survey-2015; released August 2016; ¹ Wade Pfau, How
Much Can I Spend In Retirement? Page133; Includes cash contributions, alcohol, tobacco, personal care products and
services, reading, education, life and personal insurance, and miscellaneous expenses . Bureau of Labor Statistics, U.S.
Department of Labor, The Economics Daily, Consumer spending by age group in 2015 on the Internet at:
www.bls.gov/opub/btn/volume-5/spending-patterns-of-older-americans.htm.
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Three Retirement Phases
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Source: JP Morgan, Guide to Retirement Planning; The Prosperous Retirement: Guide to the New Reality,
Michael K. Stein, CFP, 1998. pp. 16-18.
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Age-Banding Method (ABM)
The ABM divided a 30-year retirement into three ten year intervals₁:
14
Source: ₁‚₂ Somnath Basu, Professor of Finance at California Lutheran University, 2005, Financial Counseling
and Planning, Age-Banding: A Model for Planning Retirement Needs.
By age 85, real spending on basic expenses has fallen to about
50.4% of its pre-retirement level.₂
Inflation
Rate
Lifestyle
Adjustment
Factor @age 65
Lifestyle
Adjustment
Factor @ age 75
Lifestyle
Adjustment
Factor @age 85
Taxes 3% 0.5 1.0 1.0
Basic Living 3% 0.7 0.8 0.9
Health Care 7% 1.15 1.2 1.25
Leisure 7% 1.5 0.5 0.25
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Retirement Spending Smile
15
Source: Blanchett’s Retirement Spending Smile The Estimated Path of Real Retirement Spending for a
$100,000 Initial Budget at 65 vs. Constant Inflation-Adjusted Spending Strategy.
Understanding the Path of Real
Retirement Spending by Age
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Actual Expense Method
• The “actual expense method” is used to estimate after-tax
retirement income needs in current dollars and it may be a more
precise income planning method used to determine a retirement
income need. Define lifestyle:
o “Essential” Expenses (“must-have/needs”) vs. “Discretionary”
Expenses (“wants”)
• “Essential” expenses are funded with:
o Guaranteed streams of income like Social Security, pensions or
purchasing annuities¹ or TIPS to the extent necessary.
• “Discretionary” expenses are funded with:
o Less certain investments (e.g., a diversified portfolio) where
spending can be adjusted in light of the ongoing returns.
16
₁ Guarantees are backed by the financial strength and claims paying abilities of the issuing company.
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Maslow Meets Retirement
17
Source: ₁Retirement Income Redesigned: Master Plans for Distribution, by Deena Katz and Harold Evensky;
Mitch Anthony, “Maslow Meets Retirement; Abraham Maslow, “A Theory of Human Motivation” (1943).
SURVIVAL MONEY
FREEDOM MONEY
GIFT MONEY
DREAM
MONEY
SAFETY MONEY
SECURITY (the need for safety, shelter, stability)
SOCIAL (the need for being loved, belonging, inclusion)
EGO (the need for self-esteem, power,
recognition, prestige)
SELF
ACUALITATION (the need for
development, creativity)
PHYSICAL (the need for air, water, food, rest, health)
“Hierarchy of
Needs”₁
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The Balance Sheet: Asset-Liability Mgmt.
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ASSETS LIABILITIES
Human Capital Fixed Expenses
Continuing Career Basic Living Needs
Part-time Work Taxes
Debt Repayment
Home Equity
Discretionary Expenses
Financial Assets Travel & Leisure
Checking Accounts Lifestyle Improvements
Brokerage Accounts
Retirement Plans Contingencies
Long-Term Care
Insurance & Annuities Health Care
Other Spending Shocks
Social Capital
Social Security Legacy Goals
Medicare Family
Company Pensions Community & Society
Family & Community
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Retirement Income Optimization Plan
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Source: Wade Pfau, Ph.D. CFA; “How Much Can I Spend In Retirement (2018).
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Basic Sources of Retirement Income
• Three Legged Stool
o Social Security;
o Pensions; and
o Personal Savings
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Social Security
• The majority of retirees (90%) report that Social Security provides a source of
income for their and their spouse’s retirement (63%) say it is a major source of
income.¹
• How do benefits compare to earnings (“Progressive”):₂
o A worker with a lifetime of “median” earnings would replace about 38% of past earnings;
A low earner would replace about 52% of prior earnings; and A worker who had
maximum earnings would replace about 25% of prior earnings. Social Security COLA
tied to the CPI-W.
• The Bipartisan Budget Act of 2015 made several changes to the “switching
strategies” for married couples:
o File and Suspend (April 29, 2016)
o Restricted Application (age 62 by 1/1/2016)
o Deemed filing rule extended to age 70
• 76% of future retirees will likely switch advisors if their advisor can’t help
maximize SS.₃
21
Source: ¹2015 Retirement Confidence Survey, Employee Benefit Research Institute and Greewwald and Associates
https://www.ebri.org/pdf/surveys/rcs/2015/RCS15.FS-2.Expects.pdf ³National Academy of Social Insurance;
https://www.nasi.org/learn/socialsecurity/benefits-compare-earnings. ₃ Nationwide Retirement Institute, Social Security Consumer Study 2015.
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Employer Sponsored Retirement Plans
• Types of employer sponsored retirement
plans [IRC § 401(a)]:
o Defined Benefit Plans (Pension plans)
o Defined Contribution Plans (participant-
directed)
• The percentage of private sector workers
who have access to a ESRP is 66% with
a participation rate of only 50%¹
• Employer Sponsored IRAs
o SEP IRA, SARSEP IRA, SIMPLE IRA
22
Source: EBRI
https://www.ebri.org/publications/benfa
q/index.cfm?fa=retfaq14
Source: ¹Bureau of Labor Statistics, National Compensation Survey, March 2017 (http://www.bls.gov/news.release/pdf/ebs2.pdf).
Source: “Workers with access” and “Workers participating” refers to private sector wage and salary workers ages 21-64 in regards to
retirement plans: defined benefit and defined contribution. Left: U.S. Census Bureau, Bureau of Labor Statistics, Employee Benefit
Research Institute. Right: U.S. Department of Labor Form 5500 Summaries through 1998; EBRI estimates 1999-2012 using Pension
Benefit Guaranty Corporation, Current Population Survey; J.P. Morgan estimate thereafter.
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Retirement Plan Contribution Limits
23
Retirement Plan 2018 2017
Elective Deferrals: IRC § 402(g)(1) $18,500 $18,000
Catch-Up (age 50) Contributions: IRC § 414(v)(2)(B)(i) $6,000 $6,000
Traditional IRA: IRC § 408 / Roth IRA: IRC § 408A $5,500 $5,500
IRA Catch-Up for IRAs $1,000 $1,000
Profit Sharing, SEP IRAs Employer Contributions $55,000 $54,000
DB Dollar Limit:IRC § 415(b)(1)(A) $220,000 $215,000
SIMPLE IRA Elective Deferrals: IRC § 408(p) $12,500 $12,500
SIMPLE IRA: Catch-Up Contributions $3,000 $3,000
SEP Minimum Compensation Limit: IRC § 408 (k) $600 $600
Compensation Limit: IRC § 401(a)(17), 404(l) $275,000 $270,000
Key Employee Officer: IRC § 416(i)(1)((A)(i) $175,000 $175,000
Highly Compensated Employee: IRC § 414(q)(1)(B) $120,000 $120,000
Social Security Taxable Wage Base (SSTWB) $128,400 $127,200
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Four Pillars of Retirement Income
Planning₁
• Alternative (Choices₂) Sources
of Retirement Income
o Insurance products (both Life
Insurance and Annuities)
o Working in retirement
o Home Equity (one of the largest
assets on the retirees balance
sheet for many Americans).
24
Source: ₁ Geneva Association, “Four Pillars Research Program (1987) ₂Prudential Financial, “Four Pillars of
U.S. Retirement; Retirement Choices (2005)
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Working in Retirement
• Worker’s expectations to work past age 65
and even into retirement represent a dramatic
change in the long-standing vision of fully
retiring at age 65.
o More than half of workers (53 percent) expect to
work past age 65 or do not plan to retire at all.¹
• Latest data, from the U.S. Census Bureau, the
average retirement age for men is 64.6 and
women age 62.3²
• However, many retirees may retiree much
earlier.
25
Source: ¹Transamerica Center for Retirement Studies 18th Annual Retirement Survey:
www.transamericacenter.org/docs/default-source/retirement-survey-of-workers/tcrs2017_sr_three-
generations_prepare_for_retirement.pdf; ₂U.S. Census Bureau, Current Population Survey (1963-2016):
MarketWatch; https://www.marketwatch.com/story/why-the-average-retirement-age-is-rising-2017-10-09/.
Average Retirement Age,
1962-2015
U.S. Census Bureau, Current
Population Survey (1963-2016)
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Reasons for Early Retirement
26
10%
24%
4%
14%
16%
26%
41%
0% 5% 10% 15% 20% 25% 30% 35% 40% 45%
Want to do something else
Able to afford early retirement
Outdated skills
Care for spouse or family member
Other work-related reason
Changes at company (downsizing/closing)
Health problems or disability
Reasons cited for retiring earlier than planned
Source: Employee Benefit Research Institute, Mathew Greenwald & Associates, Inc., 2017 Retirement
Confidence Survey, Data as of March 2017; JP Morgan Asset Management; 2018 Guide to Retirement, page 7.
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Home Equity: Reverse Mortgages (RM)
• RM is a type of mortgage for those who are age 62 or older
(HECM….insured by FHA).
o 55 percent of net worth of Americans age 62+ tied up in Home Equity
• Following a host of recent changes to their rules, RMs have
emerged as a critical component of the retirement planning
process.
o RMs can be accessed tax-free as a lump sum, as monthly income, or
as a standby line of credit.
• This liquidity is created by borrowing against the value of the
home ($679,650 / Principal Loan Factor (PLF) in 2018) with the
flexibility to defer any repayments until after the borrower has
permanently left the home.
27
Source: Consumer Finance Protection Bureau, Reverse Mortgages Report to Congress;
http://files.consumerfinance.gov/a/assets/documents/201206_cfpb_Reverse_Mortgage_Report.pdf.
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Risks in Retirement Income Planning
• Longevity Risk
• Inflation Risk
• Market Risk
• Tax Rate Risk
• Declining Cognitive Abilities Risk
• Healthcare and LTC risk
• Spending (Withdrawal) Risk
28
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Longevity Risk
• Most significant factor in
retirement planning and the
hardest to gauge.
o Risk of outliving one’s assets.
• The probability of a 65 year-old
male reaching age 95 is 22%
and 29% for a female, and 45%
for a least one member of an
opposite gender couple₁
29
Age 65*
1 - 20 21 +
• Longevity Risk
• Inflation Risk
• Market Risk
• Tax Rate Risk
• Declining Cognitive
Abilities Risk
• Withdrawal/Spending
Risk
Source: ₁Wade Pfau, Ph.D., CFA, “How Much Can I Spend In Retirement?” (2017); page 49; Society of
Actuaries 2012 Individual Annuitant Tables with improvements to 2017
Consequences of
Living Longer
The Longevity Illustrator www.longevityillustrator.org; Livingto100.com
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Inflation Risk
• Inflation creates an increased
income demand for the remainder of
a retiree’s life (worst in later years of
retirement).
o Determines the purchasing power of
retirement income
• Assets will have to continue to grow
or be forced to reduce consumption
30
At an average inflation rate of 3%, the cost of living would double every 24 years. A
retiree’s annual income will need to increase each year even during retirement in
order to keep up with the gradual rise in prices of everyday goods.
The current inflation rate in the U.S. for the
12 months ended February 2018, 2.2%, as
published by the U.S. Labor Department.
Year 0% 2% 4%
1 $1,000 $820 $676
10 $1,000 $743 $555
15 $1,000 $673 $456
20 $1,000 $610 $375
25 $1,000 $552 $308
30 $1,000 $500 $253
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Market Risk
• The risk that the market will decline at
some point during retirement.
• Market risk quantifies the probability of
portfolio depletion especially when there
are constant withdrawals from the portfolio.
o Avoid market losses in the first 5-years
before retirement and the five years after
retirement.
31
An average retiree can expect to endure between three and five
bear markets during his/her retirement.¹
Source: ¹Jim C. Otar, Unveiling the Retirement Myth, Advanced Retirement
Planning based on Market History, (2009).
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Mathematics of Loss
• The mathematics of loss in a distribution
portfolio works entirely different from an
accumulation portfolio.
• Each time you make a withdrawal after a loss,
you create a permanent loss in the portfolio.
o Subsequently, you need to recover from the initial
losses, as well as from these permanent losses.
o Wall Street defined: “Feeding the bear”
• Recovery in a distribution portfolio is a lot harder
– if not impossible- than in an accumulation
portfolio (less risk capacity).
32
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Factors That Create Permanent Losses
• In a distribution portfolio, there are three factors that create
permanent losses:
o Sequence of returns (most important component/worst in early years
of retirement)
o Inflation (worst in later years in retirement)
o Reverse dollar cost averaging (created by cyclical trends-worst in
early years of retirement….speeds up portfolio depletion)
• Results: Time Value of Fluctuations (TVF) which is one of the
most misunderstood concepts in retirement planning.¹
33
Source: ¹Unveiling the Retirement Myth, author Jim C. Otar, page 121.
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Sequence of Returns (SOR) Risk
34
Year
Client 1:
Down Market
Initially
Client 2:
Down Market
at the End
1 -20% 24%
2 -8% 18%
3 -6% 14%
4 4% 12%
5 6% 8%
6 8% 6%
7 12% 4%
8 14% -6%
9 18% -8%
10 24% -20%
Year 10 $630,178 $1,074,455
Accumulation
Distribution Portfolio: $1 million; Annual Withdrawal: $50,000;
5.1% Average Return; 50/50 Stocks/Bonds This sample is
illustrative only. It does not reflect the return of any particular
investment. Investment returns vary. Past performance does not
guarantee future returns. Distribution:
Year
Client 1:
Down Market
Initially
Client 2:
Down Market
at the End
1 -20% 24%
2 -8% 18%
3 -6% 14%
4 4% 12%
5 6% 8%
6 8% 6%
7 12% 4%
8 14% -6%
9 18% -8%
10 24% -20%
Year 10 $1,525,347 $1,525,347
Accumulation Portfolio: $1 million with average ROR of 5.1% and a
50/50 Stock/Bond portfolio. Note: From 1926 through 2016, the
compounded inflation adjusted return for a 50/50 portfolio of the S&P 500
and intermediate term gov’t bonds was 5.1%. This sample is illustrative
only. It does not reflect the return of any particular investment. Investment
returns vary. Past performance does not guarantee future returns.
Distribution
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Managing Sequence of Returns Risk
• Four Approaches₁:
o Spend conservatively
o Maintain spending flexibility
o Reduce volatility (when it matters most)
Build a retirement income bond ladder
Build a lifetime spending floor w/income annuities
Ensure a rising equity glide path in retirement
Used funded ratio to manage asset allocation
Use financial derivatives to cut downside risks
o Buffer Assets (avoid selling at losses)
Cash reserve to fund near-term expenses
Cash value of life insurance
Line of credit from HECM RM
35
Source: ₁Wade Pfau, Ph.d., CFA, “How Much Can I Spend In Retirement?
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Tax Rate Risk
• A key goal of tax planning is to reduce your clients effective tax rate.
o The top marginal TB of 37%, when combined with the 3.8% NIIT (Medicare
surtax*), puts higher earners at a 40.8% rate for each additional $1 over the
income threshold. High earners pay on average an effective tax rate of 26%
of every dollar of income to FIT (does not including state income taxes). ¹
• Importance of Tax Efficient Saving:
o “Don’t put all of your eggs in one basket.” (Warren Buffet)
• A tax-efficient withdrawal strategy can add up to 110 bps without any
additional risk²:
o Spend from taxable portfolios;
o Spend from tax-deferred portfolios (after taking RMDS, if required); then
o Tax-free portfolio.
36
Medicare Surtax applies to investment/unearned income over $200k for singles $250k for MFJ.
Source: ¹ IRS and the Tax Foundation; https://taxfoundation.org/summary-latest-federal-income-tax-data-2016-
update/. ²Vanguard’s, Spending from a Portfolio; and Vanguard; Putting a value on your value: Quantifying
Vanguard Advisor’s Alpha; https://advisors.vanguard.com/iwe/pdf/ISGQVAA.pdf?cbdForceDomain=true;
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Tax Rates and Brackets, 2018
37
Single Tax Brackets MFJ Tax Brackets
10% $ 0.00 - $9,525 10% $ 0.00 - $19,050
12% $9,526 - $38,700 12% $ 19,051 - $77,400
22% $38,701 - $82,500 22% $77,401 - $165,000
24% $82,501 - $157,500 24% $165,001 - $315,000
32% $157,501 - $200,000 32% $315,001 - $400,000
35% $200,001 - $500,000 35% $400,001 - $600,000
37% $500,001 – or more 37% $600,001 or more
Standard deduction: $12,000
Personal Exemption: Eliminated
Standard deduction: $24,000
Personal Exemption: Eliminated
Maximize the use of marginal tax brackets (Partial Roth IRA conversions).
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Declining Cognitive Abilities Risk
• A retirement income plan must take into account
that a retiree will experience declining cognitive
(mental) abilities, hampering portfolio management
and other financial decision making.
• Two categories of intelligence that are critical to
investing:
o Fluid intelligence – the creative ability to analyze new
information and solve novel problems. Think quickly
and recall information.
o Crystallized intelligence – the ability, through life
experience, to accumulate knowledge that helps us
solve familiar problems and become better investors.
• According to Harvard Economist Professor David
Laibson, half (50%) of the 80 year old population
should not be making important financial decisions.
38
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Health Care Risk
• The majority of adults admit that one of their top fears in retirement is their health
care costs going out of control (74%) and they are terrified of what health care
costs may do to their retirement plans (64%).¹
o Health care costs have risen an average of 6% above inflation annually over the past 30
years and expected to continue to increase at that level.²
o Total projected lifetime health care premiums (Part B and Part D, Medigap and dental
insurance) for a health 65-year-old couple who retired in 2017 is expected to be
$321,994 in today’s dollars ($485,246 in future dollars. Adding deductibles, copay,
hearing, vision, and dental cost sharing, that number grows to $403,253 in today’s dollars
($607,622 in future dollars).³
• Fewer than one out of six pre-retirees over the age of 50 have attempted to
forecast how much they may need to cover healthcare or long-term care
expenses.4
o Forty-three percent erroneously believe that Medicare will cover nearly all their health
care costs in retirement₅.
39
Source: ¹Nationwide Retirement Institute Survey; https://nationwidefinancial.com/media/pdf/NFM-
16070AO.pdf?_ga=2.45831910.335999654.1518453305-449323125.1518453305: ² Bureau of Labor Statistics; ₃ HealthView Service
2017 Retirement Health Care Cost Data Report; http://www.hvsfinancial.com/2017/06/12/2017-retirement-health-care-costs-data-
report/; ₄Fidelity Consulting Group ; ₅ Age Wave/Merrill Lynch.
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LTC Risks in Retirement
• According to the CMS 70% of consumers over the age of 65 will need
some type of Long Term Services and Support (LTSS) at some point in
their life.₁²
o Federal law defines “long-term” to mean care provided for 90 days or more.
• LTC is the most overlooked source of retirement health-care expenses.₂
o Home Health Aide $49,188 annually; Adult Day Care $18,204 annually;
Assisted Living Facility $45,000 annually; and Nursing Home Costs (private
room) $97,452 annually.
• Less than 9 million Americans are protected with LTCI. The median age
when people buy LTC coverage is 55-64₃
• Medicare and Medigap plans don't cover most expenses for custodial
LTC.
40
Source ¹: Kaiser Family Foundation; https://www.kff.org/medicaid/report/medicaid-and-long-term-services-and-supports-a-primer.
₂Genworth Cost of Care 2017 Survey National Median costs : https://www.genworth.com/about-us/industry-expertise/cost-of-
care.html; ₃ Nationwide Retirement Institute and the American Association of Long Term Care Insurance.
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Withdrawal (Spending) Risk
• How much to withdraw (spend) from retirement
savings from year to year is arguably the most
important piece in the retirement finance
puzzle.
o The WR refers to the percentage of the portfolio
periodically pulled out for income.
• The WR is the single most important factor of
retirement risk (portfolio longevity).
o The only direct risk factor a retiree can control.
• Methods used to measure WR*
o Backtesting Simulations
o Monte Carlo Simulation
o Bootstrapping
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One of the key questions: “How
much can I safely withdraw
from my portfolio for the rest of
my life?”
Source: *The Efficacy of Publicly-Available Retirement Planning Tools;
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2732927
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Retirement Income (Spending) Strategies
• Retirement income strategies can be
divided into the following categories:
o Systematic Withdrawal Plan Strategy
(SWP)
o Time Segmentation (The Bucket
Strategy)
o Essential-versus-Discretionary Income
(Floor and Upside (Ceiling) Strategy.
o Purchase Income (“Life”) Annuities
42
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Systematic Withdrawal Plan Strategy
• SWP strategy is designed for the retiree to take pre-determined
periodic withdrawals from a portfolio of stocks and bonds with an
asset allocation based on volatility risk (50/50).
o The SWP, which is the most common strategy used by advisors,
uses a sustainable (safe) withdrawal rate (SWR) with no probability
of depletion to draw down a retiree’s financial wealth during their
retirement.
• The SWP is sometimes referred to as a “total return strategy.”
The client’s balance sheet and income needs don’t enter into the
calculation.
• Three broad categories
o Constant dollar strategy (the Bengen “4% rule”) the most popular;
o Fixed percentage strategy (Variable/Flexible spending); and
o Increasing percentage (RMD) strategy.
43
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Time Segmentation
• Time Segmentation is a strategy that involves investing
differently for retirement spending goals.
o Segments retirement assets into certain categories. The categories
are based on period of time in retirement when the assets are
expected to generate income.
• Time Segmentation avoids short term SOR risk.
• The most widely used time segmentation strategy is the “Bucket”
strategy.
44
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The Bucket Strategy
• Segments retirement assets by certain
categories:
o Based on the risk level of the assets, the
needs or expenses these assets are expected
to cover or the period of time in retirement
when the assets are expected to generate
income.
• Divides the retiree’s portfolio into three
segments:
o Bucket #1: Near term (1-5 years/cash/cash
equivalents)
o Bucket #2: Medium-term (5-10 years out); and
o Bucket #3: Long-term (10-30 years out/stocks).
• Protects against RDCA. Focus on long-term
investing (equities)
45
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The Floor and Upside (Ceiling) Strategy
• Starts with the retirees balance sheet and their lifestyle needs:
o Match essential expenses — the Floor — with guaranteed sources
of income. This is the critical difference between the other strategies
o Match discretionary (aspirational—needs wants and wishes)
expenses with “upside portfolio.”
• Two views of Flooring:
o Goals-based approach –essential spending needs locked in with
funding from safe investments.
o Investment based (engineering view of flooring) approach – the
amount of flooring from financial capital under current market
conditions
• Sometimes referred to as the “actuarial approach”
46
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The Floor and Upside (Ceiling) Strategy
47
Year 1
Annual spending
$40,000
Year 2
Ceiling
$42,000
Year 3
Initial annual spending
$42,840
Initial annual spending
$42,400
Floor
$39,000
Floor
$40,950
Ceiling
$44,100
Source: Vanguard.
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Income (“Life”) Annuities
• A life annuity is a contract with an insurance company to provide
a set amount of annual (or monthly) income for as long as you
live in exchange for a large payment in the case of a single
premium immediate annuity (SPIA), or years of smaller payments
for a deferred annuity, up front.
o The least favorite strategy among consumers for funding retirement.
However, most favored by economists.
• Key Benefit: The Mortality Credit
o Transfer income from individuals with shorter than expected life
spans to those with longer life spans (mortality credits)
• Both the market risk and longevity risk are mitigated
48
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1 DIAs are also known as longevity annuities and purchased during healthy years to provide income in later years when illness, dementia or other disability may set in and hinder sound income
planning decisions. 2 Some contracts contain caps on growth and limit gains attributable to account based on participation rate or other factors. 3 Guaranteed living benefits and death benefits
may be available with certain fixed and variable annuity products at additional cost. 4 While non-qualified annuities are not generally subject to RMDs, state laws requiring contract annuitization
may apply. Source: J.P. Morgan Asset Management analysis, 2017.
Understanding annuities: Which annuity may be
right for you?
49
INCOME
NOW
INCOME
LATER4
INCOME
LATER
OR
NEVER4
RISK
TOLERANCE
CONTRACT GROWTH
AND PAYOUT TYPE OF ANNUITY
Risk averse
investor
Risk averse/
moderate
investor
Moderate
investor
Moderate/
aggressive
investor
• Fixed rate of growth
• Fixed income payout
• Variable rate of growth
• Variable payout with
fixed minimum
• Variable rate of growth
• Variable income with
no guaranteed
minimum payout3
Single Premium
Immediate Annuity (SPIA)
Deferred Rate Annuity
Deferred Income
Annuity (DIA)
Qualified Longevity
Annuity Contract (QLAC)
Fixed Indexed Annuity
(FIA)
Variable Annuity (VA)
Investment Only
Variable Annuity (IOVA)
CHARACTERISTICS
• Single premium purchase payment
• Purchase payments grow at a fixed or market rate for a
specified period of time
• Often purchased to provide income in late retirement years1
• May transfer 25% or up to $130,000 from retirement account
to fund annuity; this amount exempt from RMDs at age 70½
Can only be invested in Fixed Annuity
• Must begin distributions by age 85 or as specified by
contract
• Account growth is tied to a particular index (i.e. S&P 500)
with a cap on growth in exchange for downside protection2
• Most contracts provide guaranteed minimum fixed growth
• Purchase payments are invested in subaccounts like mutual
funds
• Guaranteed living benefits (“GLBs”)3 may be available for
additional cost to provide minimum guaranteed account
growth and/or minimum guaranteed retirement income
• Purchase payments invested in a variety of subaccounts,
including alternatives and hedge funds
• Used for tax deferral, estate planning and asset location
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Survey
51
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Need More CE?
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let us help you fulfill your mandatory CE requirements.
State Hours State Hours State Hours
Alabama 21 Kentucky 14 North Dakota 21
Alaska 21 Louisiana 21 Ohio 10
Arizona 21 Maine 21 Oklahoma 21
Arkansas 21 Maryland 21 Oregon 21
California 17 Massachusetts 21 Pennsylvania 21
Colorado 21 Michigan 21 Rhode Island 21
Connecticut 21 Minnesota 21 South Carolina 21
Delaware 17 Mississippi 16 South Dakota 10
DC 21 Missouri 16 Tennessee 21
Florida 17 Montana 21 Texas 12
Georgia 11 Nebraska 21 Utah 12
Hawaii 21 Nevada 21 Vermont 21
Idaho 21 New
Hampshire 21 Virginia 21
Illinois 12 New Jersey 21 Washington 12
Indiana 21 New Mexico 15 West Virginia 21
Iowa 21 New York 15 Wisconsin 21
Kansas 21 North Carolina 21 Wyoming 21
CFP 5 or 10 CIMA/CPWA 5 or 10
To place an order
Call 1-800-345-5669 and
ask to speak with a Self-Study
Customer Service Representative
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Need More CE?
Browse our course catalog at http://selfstudyce.brokered.net and
let us help you fulfill your mandatory CE requirements.
State Hours State Hours State Hours
Alabama 20 Kentucky 12 North Dakota 20
Alaska 17 Louisiana 20 Ohio 10
Arizona 20 Maine 20 Oklahoma 20
Arkansas 20 Maryland 20 Oregon 9
California 16 Massachusetts 20 Pennsylvania 20
Colorado 20 Michigan 20 Rhode Island 20
Connecticut 20 Minnesota 20 South Carolina 20
Delaware 17 Mississippi 16 South Dakota 10
DC 20 Missouri 16 Tennessee 20
Florida 17 Montana 20 Texas 12
Georgia 10 Nebraska 20 Utah 12
Hawaii 20 Nevada 20 Vermont 20
Idaho 20 New
Hampshire 20 Virginia 20
Illinois 12 New Jersey 20 Washington 9
Indiana 12 New Mexico 15 West Virginia 20
Iowa 20 New York 15 Wisconsin 20
Kansas 20 North Carolina 20 Wyoming 17
CFP 5 or 10 CIMA/CPWA 5 or 10
To place an order
Call 1-800-345-5669 and
ask to speak with a Self-Study
Customer Service Representative
or send an email to
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