Download Making your nest egg last. Strategies for sustainable income in

Not FDIC
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FDIC
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Value
May
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No Bank
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Presented by:
Peter Dan Sullivan, CFP®
Sullivan Financial Group
111 N Last Chance Gulch St, STE3-C
Helena, MT 59601-4144
Securities and Investment Advisory Services offered
through ING Financial Partners, Member SIPC
Sullivan Financial Group is not subsidiary of nor
controlled by ING Financial Partners
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Topics for today
• 5 key challenges to prepare for in retirement
• Achieving a successful retirement
• Putting an income plan into practice
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Five challenges we
can prepare for
•
•
•
•
•
Longevity
Inflation
Health-care costs
Public policy changes
Investment risks and volatility
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Longevity: Plan on spending
25 to 30 years in retirement
Your lifespan probability after reaching age 65
Living to age 83
Probability: 56%
Living to age 89
Probability: 31%
Living to age 94
Probability: 14%
65
70
75
80
Age
85
90
95
100+
Source: National Center for Health Statistics, U.S. Life Tables, 2005. Most recent data available.
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Even low levels of inflation
make a difference over time
Amount needed to maintain purchasing power:
• 30 years
• $50,000 income
$287,174
$162,169
$90,568
2%
4%
6%
Inflation rate
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Health-care costs outpacing
inflation and earnings
• A couple age 65 retiring in 2013 needs over $200,000
in savings to fund healthcare needs in retirement
Health insurance
– Fidelity Consulting Services, 2011
premiums
172%
Workers’ earnings
47%
Overall inflation
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
20
10
20
11
20
12
19
9
9
20
00
38%
Source: Kaiser Family Foundation, April 2012.
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What about Social Security?
1950
Today
Today
$
$
There were 16
U.S. workers for
each Social
Security
beneficiary
2.8 workers for
each beneficiary
Benefits owed
currently exceed
taxes collected
2033
$0
The Social
Security
trust fund will
be exhausted
Source: Social Security Administration 2012 Annual Report.
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Where are income tax
rates headed?
U.S. federal income tax rates, 1962–2013 (%)
(%) 100
Tax rate
80
Kennedy
tax cuts
Tax Reform
Act of ’86
60
Bush/Clinton
tax hikes
Fiscal
cliff deal
Bush
tax cuts
40
20
0
1962
Bush
tax cuts
extended
2013
This chart reflects the maximum federal income tax rate at each year-end.
Source: Internal Revenue Service, 2012.
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Achieving a
successful retirement
•
•
•
•
•
Diversify to manage volatility and achieve growth
Make sure you’re not withdrawing too much
Consider adding guaranteed income
Be smart about taxes
Address other potential risks
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Choose the right
withdrawal rate
How long would your money have lasted?
Cash
10%
50
Bonds
30%
Years
40
Stocks
60%
30
20
10
0
3%
will last
50 years
4%
will last
33 years
5%
will last
20 years
6%
will last
16 years
7%
will last
13 years
8%
will last
12 years
9%
will last
11years
10%
will last
10 years
Percentage of your portfolio’s original balance withdrawn each year
This example assumes a 90% probability rate. These hypothetical illustrations are based on rolling historical time period analysis and do not account
for the effect of taxes, nor do they represent the performance of any Putnam fund or product, which will fluctuate. These illustrations use the historical
rolling periods from 1926 to 2012 of stocks (as represented by an S&P 500 composite), bonds (as represented by a 20-year long-term government bond
(50%) and a 20-year corporate bond (50%)), and cash (as represented by U.S. 30-day T-bills) to determine how long a portfolio would have lasted given
various withdrawal rates. A one-year rolling average is used to calculate performance of the 20-year bonds. Past performance is not a guarantee of
future results. The S&P 500 Index is an unmanaged index of common stock performance. You cannot invest directly in an index.
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Address longevity risk
Historical success of three asset mixes
(assumes 5% withdrawal rate, adjusted for inflation annually)
Mix
20 years
30 years
40 years
Conservative
20% Stocks
50% Bonds
30% Cash
89%
27%
3%
Balanced
60% Stocks
30% Bonds
10% Cash
96%
76%
54%
Growth
80% Stocks
20% Bonds
0% Cash
96%
79%
68%
0–59% probability
60%–79% probability
80%–100% probability
These illustrations are based on a rolling historical time period analysis and do not account for the effect of taxes, nor do they represent the performance
of any Putnam fund or product, which will fluctuate. These illustrations use the historical returns from 1926 to 2012 of stocks (as represented by an S&P
500 composite), bonds (as represented by a 20-year long-term government bond (50%) and a 20-year corporate bond (50%)), and cash (U.S. 30-day
T-bills) to determine how long a portfolio would have lasted given various withdrawal rates. A one-year rolling average is used to calculate performance of
the 20-year bonds. Past performance is not a guarantee of future results. The S&P 500 Index is an unmanaged index of common stock performance. You
cannot invest directly in an index.
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When you retire can make a big
difference
Sequence of returns risk refers to adverse effect negative investment
returns in the early stages of retirement can have on a nest egg
• Assumptions
–
–
–
–
$1 million nest egg
5% withdrawn annually and increased each year to keep up with inflation
Invested in a portfolio of 60% stocks, 30% bonds, and 10% cash
Results over a 10-year time frame
$1,731,989
$1,861,592
$1M
$472,238
Retire in 1980
Retire in 1990
Retire in 2000
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Consider diversifying more
broadly in retirement
U.S. large-cap
stocks
U.S. high-yield
bonds
U.S. Treasury bills
Hedge funds
Floating rate bank
loans
Commodities
Developed
country
international
stocks
Global investment
grade bonds
Real estate
investment trusts
U.S. investment
grade bonds
U.S. small-cap
stocks
Emerging-market
stocks
Inflationprotected
securities
U.S. growth and
value stocks
Emerging-market
bonds
Traditional asset classes are defined as those included in traditional balanced portfolios, such as stocks, bonds,
and cash, and that have been widely owned by individual investors since the post-war emergence of modern portfolio
theory.
Modern asset classes are specialized investments that were created or have become more accessible since the
advent of broader market participation by individual investors due to tax-advantaged retirement saving
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Consider adding
guaranteed income
Example
• Balanced portfolio – 50%
stocks, 40% bonds, 10%
cash
• 5% withdrawn annually
• Guaranteed income based
on current immediate
annuity rates
Probability of portfolio
survival over 30 years
93%
69%
No guaranteed
25%
income
guaranteed
income
This example is based on rolling historical time period analysis and does not account for the effect of taxes, nor does it represent the performance of
any Putnam fund or product, which will fluctuate. Assumes historical rolling periods from 1926 to 2012 of stocks (as represented by an S&P 500
composite), bonds (as represented by a 20-year long-term government bond (50%) and a 20-year corporate bond (50%)), and cash (as represented by
U.S. 30-day T-bills) to determine how long a portfolio would have lasted given various withdrawal rates. A one-year rolling average is used to calculate
performance of the 20-year bonds. Guaranteed income is based on a single premium, immediate annuity for a 65-year-old male assuming single life
expectancy. Past performance is not a guarantee of future results. The S&P 500 Index is an unmanaged index of common stock performance. You
cannot invest directly in an index.
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Pay attention to taxes
Type of income
Taxability
Social Security
May be partially taxable as ordinary income
Pension income
Taxed as ordinary income
IRA and 401(k) distributions
Ordinary income rates
Dividend income
20% maximum rate
Long-term capital gains
20% maximum rate
Roth IRAs
Not subject to taxation
Liquidation of investment principal
Not subject to taxation
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Use a Roth strategy to
control your tax bill
• Source of tax-free income in retirement
– Access to tax-free source of income provides more options
on where to draw income from
• No mandatory withdrawals at age 70½
• Having a portion of retirement savings in a Roth IRA
can provide a hedge against the threat of rising taxes
in retirement
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Preserve your wealth in retirement
through tax efficient withdrawals
Retirement situation
Proposed course of action
Lower marginal tax rate
Draw from traditional retirement accounts to
maximize use of lower relative tax bracket, which
may help to reduce RMDs at age 70½
Higher marginal tax rate
Use tax-free or taxable assets to avoid higher income
tax rates and potentially take advantage of lower
capital gains rates
Significant appreciation
in a taxable account
If leaving an inheritance, preserve taxable assets to
take advantage of “stepped-up” cost basis at death
Working in retirement
Avoid traditional retirement accounts, which will
increase overall income (higher income could trigger
taxes on Social Security benefits)
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Address other specific risks
Post-retirement risk
Risk management tool
Unexpected
health-care costs
Medigap supplemental coverage or
health-care “emergency fund”
Loss of ability to live
independently
Long-term-care insurance or
health-care “emergency fund”
Catastrophic medical or
long-term-care costs
Life or long-term-care insurance
Lawsuits or creditors
Trusts
Spending the children’s
inheritance
Life insurance/irrevocable life
insurance trust
Inability to fulfill
charitable intent
Charitable remainder trust or
charitable annuity
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Putting an income plan
into practice
• Expense approach:
Matching income sources with expenses
• Time-frame approach:
Considering a bucket strategy
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Match potential sources of income
to expenses in retirement
Essential expenses
•
•
•
•
•
•
Annuities
Social Security
Dividends
Pension income
Interest
Required minimum distributions
Discretionary
expenses
• Employment income
• Portfolio withdrawals
• Personal savings
Unforeseen
expenses
• Real estate
• Life insurance
• Long-term-care insurance
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Consider a bucket approach
Short-term income
(0–2 years)
Mid-term income
(2–10 years)
Long-term income
(10+ years)
Meet immediate cash-flow
needs, emergency fund, etc.
Mix of growth and income,
replenish short-term bucket,
guard against market volatility
Inflation hedge, address
longevity risk
• Cash
• CDs/money market
• Bonds
• Deferred annuities
• Growth stocks/funds
• Real estate
•
•
•
•
• Absolute return funds
• Asset allocation funds,
balanced funds
• Commodities
• Longevity insurance
Short-term bonds
Immediate annuities
Social Security/pension income
Wages
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Closing thoughts
• The retirement landscape will continue to evolve
• It’s critical for investors to prepare for certain
(and uncertain!) risks
• A thoughtful income strategy can help you address
these challenges and attain the lifestyle in retirement
you desire
• Meet with your financial advisor to assess your
personal situation
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Additional resources
•
•
•
•
•
Books
Longevity Revolution: As Boomers
Become Elders, Theodore Roszak
AgeQuake, Paul Wallace
Age Power: How the 21st Century
Will Be Ruled by the New Old,
Ken Dychtwald, Ph.D.
We're Not in Kansas Anymore:
Strategies for Retiring Rich in a
Totally Changed World,
Walter Updegrave
How Not to Die Broke at 102,
Adriane Berg
•
•
•
•
•
•
On the web
AARP, www.aarp.org
Social Security Administration,
www.ssa.gov
American Savings Education
Council, www.asec.org
ElderWeb, www.elderweb.com
Medicare, www.medicare.gov
National Association of Home
Care Providers, www.nahc.org
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A BALANCED APPROACH
A WORLD OF INVESTING
A COMMITMENT TO EXCELLENCE
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Investors should carefully consider the
investment objectives, risks, charges, and
expenses of a fund before investing.
For a prospectus, or a summary prospectus if
available, containing this and other information
for any Putnam fund or product, call your
financial representative or call Putnam at
1-800-225-1581. Please read the prospectus
carefully before investing.
Putnam Retail Management
putnam.com
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Not FDIC
Insured
May Lose
Value
No Bank
Guarantee
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