This document provides information to help plan for a financially secure retirement. It discusses important questions to consider, such as saving enough and having realistic spending goals. It also outlines risks like longevity, inflation, market uncertainty and illness that are hard to control. The document emphasizes the importance of retirement planning and monitoring expenses, income sources, asset allocation and withdrawals over time to adapt to changes. The overall message is to carefully assess savings, income needs, guaranteed versus non-guaranteed income sources and use tools like annuities to optimize securing a stable retirement.
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Questions?
Annuity products are insurance products that aim to provide a guaranteed stream of fixed payments over a period of time. Any guarantees made are subject to the claims-paying ability of
the annuity-issuing insurance company. Annuities are not designed for short-term investment needs and are not liquid investments. If an annuity is surrendered early, certain fees and
charges may be incurred as well as potential tax penalties.
This is not a solicitation to sell a specific product, but rather, is an illustration of the effects of adding guaranteed income to the risk, return and stability of a portfolio over time.
Please consult with the appropriate financial and investment professional(s) regarding any specific situations before implementing any of the strategies discussed.
Neither Janney nor its financial advisors provide tax or legal advice and this Report shall not be construed as providing tax or legal advice.
Notas del editor
Hi, I’m [Name and Title] of [Firm]. I’m glad you could join me for our presentation, Test Drive Your Retirement: Making Your Retirement Income and Resources Last. You’ve saved and planned and you’re almost there — ready to retire. Or maybe you recently retired. In either case, now is the time to look at your retirement resources, determine your potential retirement income, and consider how to make that income last for your lifetime.
Today, I’m going to talk about how you can get answers to the difficult retirement questions. Have I saved/am I saving enough? What are my retirement income sources? Are my retirement income spending goals realistic? Will my assets last through my retirement? How can I best monitor my investments and spending during retirement?
A variety of risks can put roadblocks in your path to a financially secure retirement.
Some of the risks, such as not saving enough for retirement, retiring too soon, and overspending during retirement, are generally under your control. Evaluating your potential retirement income and expenses before retiring can help you make decisions that should allow you to circumvent these roadblocks. Other risks to your retirement security aren’t as much under your control. For example: Your longevity Inflation and its effect on prices Financial market performance The possibility you’ll need long-term care at some time
Unless you’re aware of these risks and plan for them, you put yourself in danger of running out of retirement assets and income. A recent study by the National Bureau of Economic Research found that about 46% of Americans die with virtually no financial assets — less than $10,000.
Let’s look at some of the risks that aren’t under your control and how we can work together to reduce the potential roadblocks to a comfortable retirement. One risk factor is that people are living longer than ever, increasing the chances that they’ll run out of money. What do you think the average life expectancy is for a person your age and gender? [Give the audience a moment to think; ask for responses, if desired.] Here are figures from the U.S. Department of Health and Human Services. How close were you? According to a study sponsored by The Society of Actuaries, preretirees and retirees tend to underestimate life expectancy. Generally, you should plan on retirement lasting at least 20 years. Using a realistic life expectancy projection in your planning can help you have the assets you may need for income and financial emergencies during retirement.
Inflation is another risk. Over the past 20 years, overall annual inflation, as measured by the Consumer Price Index, has averaged only about 2.5%. But, over time, even low inflation can have a significant impact on the cost of goods and services. Take a look at the graph. A “basket” of goods and services we might have paid $100 for in 1993 costs more than one and one half times that amount today. And the rise in the costs of some essential items has been even steeper. Not considering the long-term effects of inflation could make your later retirement years particularly challenging.
Inflation can also negatively impact retirement investments. For example, when inflation is low, the interest rates paid on many fixed income investments, such as certificates of deposit, other savings accounts, and U.S. Treasury securities, are also low. You earn less income. Take a look at the graph. Someone who retired in 2000 expecting $5,000 a year from his or her fixed income investments would have seen some lean times in the years since. Over the past few years, average interest rates for six-month CDs and Treasuries have been below 1%.
Continuing to invest a portion of your assets in stocks after you retire may help your portfolio keep pace with inflation. But stock performance can be volatile, as we all know from the “lost” decade — 2000 to 2009 — when the stock market posted an overall negative 10-year return. Withdrawing even a relatively small amount from retirement savings at the wrong time — during a stock market decline, for instance — can cause you to run out of assets more quickly. Fixed income returns have been more consistent and generally positive for the past 20-years, but even fixed income investments aren’t immune from volatility. Because different asset classes may perform better than others from year to year, it’s important to maintain a diversified portfolio during retirement. The graph shows how using a simple 60% stock/40% bond portfolio over the 20-year period could have helped an investor avoid some of the stock market’s high peaks and low troughs and still realize portfolio growth similar to being 100% invested in stocks. Of course, the appropriate diversification for your retirement portfolio will depend on your personal situation and risk tolerance.
Now, let’s take a look at a final retirement risk that’s beyond your direct control — the possibility of your needing long-term care sometime in the future. No one likes to think about needing long-term care services, but considering that possibility and factoring it into your retirement income planning can make a big difference in how comfortable your later retirement years may be. According to the National Clearinghouse for Long-Term Care Information, almost 70% of people over age 65 may need long-term care. The average length of a nursing home stay in the U.S. is about two and a half years. The length of a stay in an assisted living facility is about two years. As you can see from the graph, long-term care costs can hit retirement resources hard.
A growing awareness of the potential risk of a shortfall in retirement resources is changing the face of retirement. Many people are looking at the factors they may be able to control, such as when to retire, and adapting their retirement plans. More people are delaying retirement. In 1991, 11% of Americans planned to retire after age 65. By 2012, that percentage had more than tripled to 37%. Others are changing careers later in life to something slower paced and/or more fulfilling. Still others are easing into full retirement by taking on freelance or consulting work or by simply working part-time to supplement their retirement income.
While it’s generally an individual decision, not everyone has the opportunity to choose when they want to retire and whether they’ll continue to work during retirement. The 2012 Retirement Confidence Survey found that half of current retirees surveyed say they left the work force unexpectedly due to: Health problems or disability — their own, a spouse’s, a parent’s, or another family member’s — or Changes at their employer, such as downsizing or closure. The bottom line is: Don’t depend too heavily on income from working past traditional retirement age.
Now that we’ve considered the financial risks retirees face, let’s look at retirement income.
If you’re like most retirees, you’ll have two types of income. Guaranteed income pays you a reliable set amount weekly, biweekly, monthly, or annually. You might think of it as a “paycheck” for life. Nonguaranteed income generally comes from your invested assets. The amount of income you receive can vary based on the amount you’ve invested and your investment returns. Nonguaranteed income ends when you’ve depleted all of your investments and the returns they’ve generated.
What types of income might you have? On the guaranteed income side, you might have pension payments from a former employer’s defined benefit retirement plan. However, this type of retirement income is becoming less common. Only about a third of current workers report that they or their spouses will qualify for a pension from a current or previous employer. Most people can expect to receive Social Security retirement benefits. How many of you have looked at your Social Security Statement and know what you can expect to receive? Show of hands. If you haven’t, you might be surprised to know that the maximum Social Security benefit in 2013 is $2,533 a month or $30,396 a year. The average payment is $1,261 a month or $15,132 a year. Obviously, you can count on Social Security for only a portion of your retirement income. A third type of guaranteed income you might have is an annuity from a private insurance company.
Your nonguaranteed income might be generated by: A retirement savings plan, such as an employer-sponsored 401(k) or 403(b) plan or an individual retirement account, Personal savings and investments, Real estate that produces rental income or the equity in your personal residence or vacation home, Investing the proceeds from the sale of a business, or Wages or self-employment income. You might think that wages and rental income should fall into the guaranteed income category. But, as we discussed earlier, you shouldn’t plan too heavily on being able to work during retirement, and economic conditions can affect rental income.
For a successful retirement, most retirees need both types of income — ideally, guaranteed income to cover basic living expenses and nonguaranteed income to use for discretionary spending, unexpected expenses, and inflation protection. Some guaranteed income sources aren’t adjusted regularly for increases in the cost of living.
What if it looks like your guaranteed income isn’t going to cover your basic living expenses or your total income will fall short of your projected retirement expenses? You’ll need to take steps to close the gap. As we discussed earlier, you may be able to postpone retirement for a while or work part-time during retirement. Working even for a few years during retirement may help cover health care and other necessary expenses and lower withdrawals from your retirement portfolio. Also look at reducing some of your discretionary expenses and Paying off debt. Reducing debt lowers your basic income requirements. You might cash in a permanent life insurance policy that you no longer need and invest the proceeds or If you have equity in your home, consider selling it and downsizing to reduce expenses.
One way to make up a shortfall in your guaranteed income is to convert one or more nonguaranteed income sources into guaranteed income by purchasing an immediate income annuity. You could use personal investments, assets in an IRA or other retirement savings plan account, or the cash value of a life insurance policy you no longer need. Like a pension, an annuity can pay you, or you and another person, a fixed income for life. And buying a fixed annuity will provide you with an income that won’t fluctuate with the value of your investments. Talk with us. We can tell you more about annuities and other insurance solutions.
Working with your financial advisor to determine a sustainable withdrawal rate from your retirement portfolio is another important part of retirement income planning. Withdrawing too much money too soon or making too large of a withdrawal at the wrong time can deplete your investments sooner than you intended. Once you’ve set your annual withdrawal rate, stick with it, even if the value of your investments declines and your withdrawal amount for the year will be lower. To compensate for the smaller withdrawal amount, look at ways to reduce your discretionary spending.
And the planning continues throughout your retirement.
To stay on top of your income needs and make your retirement resources last, you’ll need to monitor your investment performance and reevaluate the assumptions used to determine your withdrawal rate annually. For most people, early retirement is a more active time. You may finally get to do all of the things you’ve put off during your working years — travel, hobbies, starting your own business. You’ll probably want more discretionary income in the earlier years of your retirement than in later years. When you’re older and more settled into retirement, expenses may be more fixed and, as our graph shows, could even decline.
The types of expenses you’ll have may change at different points in your retirement. While discretionary spending may decrease, medical expenses will probably increase. And you could have additional expenses for help with tasks you no longer want to do or no longer can do, such as housekeeping and home maintenance. In addition, you may be less able to compensate for market drops by decreasing your discretionary spending. Your withdrawal rate from your retirement portfolio may have to be adjusted to accommodate these changes.
You’ll also want to reconsider your willingness and capacity to accept market risk as you move into and through retirement. Typically, people become more conservative investors when they retire (and become increasingly conservative during their retirement years). The pie charts show how an individual’s investment portfolio might be invested more conservatively over time. Generally, stocks are considered to carry higher risk than fixed income investments, and cash alternatives are considered to carry the least risk of the three major asset classes.
To have the retirement income you’ll need and to protect against depleting your retirement portfolio, periodic changes to your portfolio’s asset allocation may be necessary. Many retirees invest to preserve their principal and produce income. When you’re making changes, though, don’t overlook the need for continued portfolio growth. If you invest too conservatively, your investment returns may not keep pace with inflation, and you could have difficulty meeting your income needs. Most financial advisors agree that stock investments have a place in retirement portfolios. In fact, adding high-quality stock investments to a portfolio may help reduce overall risk and produce more consistent returns.
When you work with us, we take asset allocation a step further.
For example: We consider your guaranteed income as an additional asset class, along with your stock, fixed income, and cash investments, and We analyze your income sources to determine an income coverage ratio. This is the ratio of income expected to be generated by your guaranteed income sources versus income from your nonguaranteed sources.
As part of this retirement income analysis, we look at all of the factors that may affect your need for guaranteed income, as well as at your investment portfolio — factors such as Your age Risk tolerance Legacy goals Your investment time frame The amount of your investable assets Your preference for or against using insurance products
Then, we use our retirement income evaluation tool to create a retirement picture that estimates how your income and assets may be used during your retirement and shows the probability of your income lasting for your lifetime. This retirement picture is based on information you have provided about your estimated retirement date and spending needs, as well as assumptions about investment performance, inflation, and other factors. In the picture, the bottom blue line represents the individual’s basic retirement income needs, the upper purple line represents the retirement income required to meet the individual’s retirement needs and wants, and the green line represents the achievable income goal given the individual’s current retirement income sources and assumptions. As you can see, this individual faces a retirement income shortfall. Later on, I’ll show you some steps that could be taken to remedy that.
We also provide a projection of your current retirement income sources and recommend an optimal mix to meet your retirement goals. The orange band on the outside of the pie charts indicates guaranteed income sources and the blue band indicates nonguaranteed income sources. [Optional: If, as in this illustration, your guaranteed income sources fall short — that is, fail to cover your projected basic expenses — we can discuss with you how you might use an annuity or other insurance solutions to convert some of your nonguaranteed income sources into guaranteed income.]
Once we’ve reviewed your income sources and made an income projection, we analyze your current asset allocation, taking into account historic rates of return and your risk tolerance, and recommend changes based on your personal retirement goals that may better help you meet those goals.
Then, we create a new retirement picture for you with the changes we recommend. What if you don’t agree with or aren’t comfortable with some of the recommendations? We can run various scenarios showing how taking different actions would change your retirement picture. For example, let’s go back to the retirement picture I showed you earlier [click] and: [Click for 1 st change] Here we’ve invested the cash that represented 30% of the investable assets. While we’ve increased the risk to the portfolio, investing the cash provides the opportunity to keep pace with inflation. [Click for 2 nd change] Here, in addition to investing the cash, we sold a second home and invested the proceeds. This change eliminates the shortfall and, as you can see, the maximum retirement spending line (the green line) has gone above the desired retirement spending. [Click for 3 rd change] In this scenario, we still sell the second home and invest the proceeds. However, we’ve added an additional expense to help pay for the grandchildren’s college expenses. As you can see, this change puts us back into a shortfall. The individual should reconsider how much he or she wants to pay for college or whether he or she should start saving more for retirement. As you move through retirement, we can use this feature to update your retirement picture and make any needed revisions to your retirement income plan.
Then, we create a new retirement picture for you with the changes we recommend. What if you don’t agree with or aren’t comfortable with some of the recommendations? We can run various scenarios showing how taking different actions would change your retirement picture. For example, let’s go back to the retirement picture I showed you earlier [click] and: [Click for 1 st change] Here we’ve invested the cash that represented 30% of the investable assets. While we’ve increased the risk to the portfolio, investing the cash provides the opportunity to keep pace with inflation. [Click for 2 nd change] Here, in addition to investing the cash, we sold a second home and invested the proceeds. This change eliminates the shortfall and, as you can see, the maximum retirement spending line (the green line) has gone above the desired retirement spending. [Click for 3 rd change] In this scenario, we still sell the second home and invest the proceeds. However, we’ve added an additional expense to help pay for the grandchildren’s college expenses. As you can see, this change puts us back into a shortfall. The individual should reconsider how much he or she wants to pay for college or whether he or she should start saving more for retirement. As you move through retirement, we can use this feature to update your retirement picture and make any needed revisions to your retirement income plan.
Then, we create a new retirement picture for you with the changes we recommend. What if you don’t agree with or aren’t comfortable with some of the recommendations? We can run various scenarios showing how taking different actions would change your retirement picture. For example, let’s go back to the retirement picture I showed you earlier [click] and: [Click for 1 st change] Here we’ve invested the cash that represented 30% of the investable assets. While we’ve increased the risk to the portfolio, investing the cash provides the opportunity to keep pace with inflation. [Click for 2 nd change] Here, in addition to investing the cash, we sold a second home and invested the proceeds. This change eliminates the shortfall and, as you can see, the maximum retirement spending line (the green line) has gone above the desired retirement spending. [Click for 3 rd change] In this scenario, we still sell the second home and invest the proceeds. However, we’ve added an additional expense to help pay for the grandchildren’s college expenses. As you can see, this change puts us back into a shortfall. The individual should reconsider how much he or she wants to pay for college or whether he or she should start saving more for retirement. As you move through retirement, we can use this feature to update your retirement picture and make any needed revisions to your retirement income plan.
Then, we create a new retirement picture for you with the changes we recommend. What if you don’t agree with or aren’t comfortable with some of the recommendations? We can run various scenarios showing how taking different actions would change your retirement picture. For example, let’s go back to the retirement picture I showed you earlier [click] and: [Click for 1 st change] Here we’ve invested the cash that represented 30% of the investable assets. While we’ve increased the risk to the portfolio, investing the cash provides the opportunity to keep pace with inflation. [Click for 2 nd change] Here, in addition to investing the cash, we sold a second home and invested the proceeds. This change eliminates the shortfall and, as you can see, the maximum retirement spending line (the green line) has gone above the desired retirement spending. [Click for 3 rd change] In this scenario, we still sell the second home and invest the proceeds. However, we’ve added an additional expense to help pay for the grandchildren’s college expenses. As you can see, this change puts us back into a shortfall. The individual should reconsider how much he or she wants to pay for college or whether he or she should start saving more for retirement. As you move through retirement, we can use this feature to update your retirement picture and make any needed revisions to your retirement income plan.
The evaluation tool can also be used to help you better understand your current expenses and how crucial budgeting is to retirement income planning. We give you a visual of where you can save money, if necessary, and how reducing different expenses would affect your retirement picture. We also show you current expenses that will continue through retirement, expenses that will decrease or go away, such as a home mortgage or other debt, and expenses that are likely to increase, such as health care.
Are you ready to get started on creating a retirement income plan that can help give you a comfortable retirement? All you need to do is: Make a list of your expenses and categorize them as needs and wants Gather information about your retirement income sources Complete the Retirement Income Evaluation Information sheet Mail or drop off your information and any accompanying statements and documentation to your financial advisor
Once we’ve received your information: Your Janney Financial Advisor will contact you to discuss it and let you know if any additional information is needed. He or she will prepare an initial analysis. Then, you’ll meet to discuss the analysis and Your advisor will present his or her initial recommendations. When you’re happy with the recommendations, you give your final approval and your advisor implements them. But that’s not the end. We recommend that you meet with your advisor periodically to review the analysis and recommendations to determine whether they need to be updated to reflect your current goals and situation.
Thanks so much for coming today. I know I’ve covered a lot of material. If you have any questions about the topics we've covered or the steps you should take to put your retirement income plan into action, I’ll be happy to answer them now.