4. Retirement reality AAS Team http://www.dol.gov/ebsa/publications/nearretirement.htmll, as of December 1, 2009 This hypothetical example is shown for demonstration purposes only. With $200/month additional savings at 5% per year over 10 years Year Start Add Rate Year end 1 $40,000.00 $200/month 5% $44,512.50 2 $44,512.50 $200/month 5% $49,255.80 3 $49,255.80 $200/month 5% $54,241.90 4 $54,241.90 $200/month 5% $59,483.00 5 $59,483.00 $200/month 5% $64,992.30 6 $64,992.30 $200/month 5% $70,783.40 7 $70,783.40 $200/month 5% $76,870.80 8 $76,870.80 $200/month 5% $83,269.70 9 $83,269.70 $200/month 5% $89,995.90 10 $89,995.90 $200/month 5% $97,066.20
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6. Retirement reality AAS Team This chart shows how long retirement savings will last at a 4%, 5%, 6%,and 8% annual year-end withdrawal rate. The chart is a hypothetical example and assumes $500,000 beginning balance in retirement, a 3% annual inflation rate, and a 6% annual interest rate. This does not represent the performance of any specific investment product. Rate of withdrawal $700,000 $600,000 $500,000 $400,000 $300,000 $200,000 $100,000 65 80 88 95 112 8% 6% 5% 4% This chart is for illustrative purposes only. Withdrawal rates important
7. Agenda AAS Team Retirement today Taking action Refocusing/repairing/rebuilding Putting it all together Options
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11. AAS Team Saving more now can reduce the amount of income needed later Moving forward $45,000 $5,000 401(k) Pension 401(k) $16,000 $7,000 $10,000 74% Today Retirement Social Security The visual is a hypothetical example only. Retirement income numbers used is for demonstration purposes only.
12. AAS Team Saving more now can reduce the amount of income needed later Moving forward $45,000 $5,000 401(k) Pension 401(k) $16,000 $7,000 $10,000 74% Today Retirement Social Security $15,000 $42,000 $3,000 90% Assumes hypothetical 5% rate of distribution over 20 years The visual is a hypothetical example only. Retirement income numbers used is for demonstration purposes only.
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15. Three levels of retirement expenses AAS Team Expenses Expenses to cover your most basic needs Lifestyle “extras” Funds remaining for your beneficiaries 3 Refocusing, repairing, rebuilding Desired Legacy Survival
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17. Seven sources of retirement income AAS Team 7 Sources of Income The base Employer sponsored plans (ERISA) Contributions and rollovers from ERISA plans Tax deferred / tax free Mutual funds, CDs, stocks, bonds Phase into retirement gradually Not desirable Refocusing, repairing, rebuilding Roth IRA Welfare - charity Nonqualified Assets (NQA) Traditional IRA Qualified ERISA Social Security Continued employment
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19. Retirement accumulation stage AAS Team Retirement accumulation stage Retirement income stage Financial objective Have enough money to retire Asset allocation Portfolio allocation Time horizon Known to retirement Options
20. Retirement income stage AAS Team Retirement accumulation stage Retirement income stage Financial objective Have enough money to retire Not outlive assets Asset allocation Portfolio allocation Withdrawal allocation Time horizon Known to retirement Unknown to date of death Options
21. AAS Team Retirement accumulation stage Retirement income stage Financial objective Have enough money to retire Not outlive assets Asset allocation Portfolio allocation Withdrawal allocation Time horizon Known to retirement Unknown to date of death Options Rethinking retirement strategy Rethinking retirement strategy Rethinking retirement expenses Rethinking portfolio with longer-term guarantees Rethinking retirement income protection vehicles
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25. 5 options for income/expense gaps AAS Team Putting it all together Sources of Income Welfare – charity Nonqualified Assets Roth IRA Traditional IRA Company retirement programs Social Security Continued Employment 7 Survival Desired Legacy Expenses 3 Options Lower your expectations Spend less and save more now Decide to work longer. Take on more risk Combination (or all) of above 5
26. How do the 5 options work? AAS Team $ needed to supplement income Combination of all options This example is shown for illustrative purposes only and is not intended to predict or project future results. Your actual results will vary. Please note that with the potential for greater returns comes greater risk and volatility. Putting it all together Time $ now (401(k)) $ additional (401(k)) $ more 70? Conservative 4 - 6% Moderate 6 - 8% Aggressive 8 - 10% Current standard of living Age 45 65 Retirement
27. Combination most effective AAS Team Putting it all together Age $ needed to supplement income 65 This example is shown for illustrative purposes only and is not intended to predict or project future results. Your actual results will vary. Please note that with the potential for greater returns comes greater risk and volatility. Time Current standard of living $ additional (401(k)) $ more 68? Conservative 4 - 6% Moderate 6 - 8% 45 65
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29. Summary AAS Team Retirement today Taking action Refocusing/repairing/rebuilding Putting it all together Options
02.06.10 We are living longer, healthier lives Retirement is an opportunity for us to pursue hobbies, travel, visit, etc. But, for many of us, the real retirement dream may be to be financially independent. To accomplish this, you need realistic retirement strategies to help make that happen.
02.06.10 Because, a retirement reality can be different than our retirement dreams. Planning ahead for our retirement can be difficult. We do not plan to fail, we often fail to plan. Part of the reason people may not be making retirement strategies is that because many other issues are given priority. For example, their children’s education, loss of a job, or care for adult family members. But, by not doing something, even small things, for your own retirement can become critical later on. The longer you wait to prepare for retirement, the harder it can be to make up the difference. Even a few years can make a big difference [click]
02.06.10 Let me illustrate how saving just a little (for example $200 month) starting right away can make a huge difference over 10 years. According to an article in US News and World Report, January 13, 2009, the average amount in a 401(k) is about $64,000. So, to demonstrate even conservatively we will use $40,000 and show what saving $200 per month, after 10 years would do to your 401(k). Starting with $40,000 adding $200 per month at a hypothetical rate of 5% over 10 years, at the end of those 10 years, you would have $97,066.20. In just 10 years, you would have $57,066.20 more than what you started with. [Note: the 5% rate over 10 years was used directly from the article] This helps to demonstrate why it is never too early for you to consider starting your retirement savings strategies. [Note: Disclosure for article mentioned above: US NEWS and World Report, January 13, 2009, by Emily Brandon, Most 401(k) participants have very small or very large account balances.]
02.06.10 As we just demonstrated, it is never too early to get started with your retirement strategies. Every day lost can mean more retirement income to make up for later. Withdrawal rates can also affect your plans. We have a finite amount of money saved for retirement. If we keep the same standard of living, it can deplete sooner than expected. Let’s take a look.
02.06.10 This chart illustrates how long retirement savings will last at various withdrawal rates. We are assuming a 6% rate of return and increasing the withdrawal at 3% per year as an inflation adjustment. [click] Here we see that at an 8% withdrawal rate a 65 year old will run out of money at approximately age 80. [click] If we assume a 6% withdrawal rate the money is gone at by approximately age 88. [click] A 5% withdrawal rate would deplete the account at around age 95. [click] And a 4% withdrawal rate would stretch the account to age 112. The moral of this particular story is if you take a withdrawal rate greater than 5% you could be asking for trouble by running out of money too soon. It begs the questions, “Will you have enough money accumulated at retirement so you can use a comfortable withdrawal rate?” This demonstrates the basic math associated with retirement strategies.
02.06.10 So, our agenda starts with looking at the retirement reality of today. Some of us fail to act because we don’t know where to start We will discuss how to help you take action with a refocusing, repairing, and rebuilding approach. We will look at options on how to help you get started. And then finish up with putting it all together.
02.06.10 Let’s start by looking at the retirement reality of today. Recent market turmoil may be adding to the fear for many of us that we may end up running out of money in retirement. This fear often makes us afraid to take action. We don’t know where we are with our retirement strategies. And we may even be afraid to find out. Many of you may be facing job losses or have the fear of losing your jobs. This can also cause you to freeze from taking any action for the future. Or, other needs are given a priority. It is important to take care of your own retirement needs so you can be in better financial shape to help others during your retirement if that is one of your goals.
02.06.10 What I can do as your financial professional is to help you refocusing/repairing/rebuilding your retirement strategies. We will walk through where you are at currently, and where you want to be. This will help you to refocus, repair and rebuild your retirement strategies. The key to helping you move forward with action is to start with refocusing on what you CAN control.
02.06.10 So, what is the first step to helping you move forward? Saving more now. Many of us don’t save enough because it involves unpleasant things like budgeting and sometimes doing without things we want. However, this is often a necessity. We may consider saving a little regularly through a variety of sources. Let me start by demonstrating how the more you save now, can mean less retirement income you will need to replace later.
02.06.10 To demonstrate how saving more now can reduce amount of retirement income needed later, let’s look at this hypothetical visual. What if you were making $50,000 gross a year and putting away 10% into your 401(k). (10 % of $50,000 or $5,000). That would leave you with a current income or standard cost of living of $45,000. We will hypothetically jump ahead 20 years into your first year of retirement. For demonstrations purposes only let’s assume you will receive that year $16,000 in Social Security benefits, $7,000 in pension benefits, and that your 401(k) has produced $10,000 of income in their first year of retirement (assuming you contributed yearly, you receive a reasonable rate of return, etc. – all hypothetical and for demonstration purposes only). [click] That means you would be $10,000 short of your current standard of living. This gives you 74% of what you would need for retirement income.
02.06.10 However, what happens if you were able to save an additional $3000 per year in your 401(k)? Something you might be able to live with? In 20 years, that would bring you hypothetically $5,000 of additional income in your 401(k) for your first year of retirement [click] (assumes a hypothetical 5% rate of distribution over 20 years) Which would bring you to 90% of your current standard of living. You would now that much closer to your current standard of living into your retirement.
02.06.10 Second, it is very important to control debt. This should be started immediately as well. This too can be difficult because it may mean going without something. The immediate gratification is a tough pull. But, it is very important to try to avoid buying things that you can not pay for and racking up debt. Third, we can also discuss options of working longer which can delay your pension and Social Security giving you an additional year or more to accumulate income. And finally, look at options to protect your assets.
02.06.10 I’m going to start by helping you to REFOCUS your efforts on things that you can control today, so that when you retire you will potentially have an income stream that you can manage to. I have a survival and desired income worksheet for you to fill out that will help us determine expenses that you must have for retirement as well as those that we wish to have for our retirements. Let me show you how this works.
02.06.10 To begin the REFOCUSING on a retirement budgeting process, lets start by examining three levels of retirement expense needs. 1. Survival expenses are the ones you need to cover your most basic needs such as food, clothing, shelter, etc. 2. Desired expenses are those extra things such as travel, gifts for children and grandchildren, the theater, etc. 3. And finally, Legacy is any funds you have remaining to pass along to your beneficiaries or charities. It also involves any wishes or desires you may have for non-financial things.
02.06.10 Secondly, I want to help you REPAIR your retirement strategies by reviewing possible sources of retirement income Such as: Social security Defined benefit plans And 401(k)s I just mentioned three, but let’s look at seven possible sources of income for your retirement to help explain this..
02.06.10 Here are seven possible sources of retirement income starting from the bottom and building up. CLICK. Social Security is the base. Ever since it was signed into law in 1935, the premise has been that Social Security is a supplement. It has never been intended to fully fund a person’s retirement income. As with any pension plan, the earlier you begin receiving benefits, the lower those benefits will be. CLICK. The second source of retirement income is employer sponsored retirement plans (such as 401(k), defined benefit, and SEP plans). We group these together because they have unique characteristics compared to other retirement programs. CLICK. The third source is traditional IRAs. At retirement, employer-sponsored plan participants often roll their plan proceeds into traditional IRAs to take advantage of additional flexibility in taking withdrawals. Of course, most employer-sponsored retirement programs and all traditional IRAs have required minimum withdrawals beginning around age 70½. CLICK. Our fourth source of retirement income is the Roth IRA, which can be funded either from annual contributions or conversions from Traditional IRAs or some employer-sponsored retirement plans. Roth IRAs are one of the last income sources that people tap because of their tax-deferred and tax free nature. In addition, Roth IRAs are about the only retirement program that does not have required minimum distributions. CLICK. The fifth source of income will be your nonqualified assets (including personal investments in mutual funds, CDs, stocks, bonds, investment real estate, etc.) CLICK. The sixth source of income, continued employment, hasn’t traditionally been viewed as a retirement income strategy, but is becoming increasingly common. So – one consideration for some people is to phase into retirement gradually, and possibly delay beginning to receive Social Security retirement income. The monthly benefit increases each month between your full retirement age and age 70. CLICK. The final source of retirement income is one that very few people want to tap into—welfare or charity. We can agree that is not appropriate for you.
02.06.10 And lastly, let’s move into a REBUILDING phase of income protection strategies for your retirement. One strategy may be a defined benefit pension plan which can offer more optional guarantees and create a reliable stream of future income. The initial concept of a defined benefit plan was appealing to many because it involves passing the cost onto the employer. However, it is because of that that few are offered to many anymore today. But, there are alternatives to defined benefit plans such as protecting your assets and providing retirement income. We can discuss those options if they are appropriate for your situation. Another strategy could having your survival income needs placed with your existing guarantee vehicles.
02.06.10 So, after all that, what options exist for you? Retirement planning can be divided into two distinct stages: the accumulation stage and the retirement income stage. CLICK (text appears in Accumulation Stage). The accumulation stage is where many people concentrate. In this stage, you are saving and investing for retirement. The overall financial objective throughout this stage is, of course, to have enough money to retire. When thinking about your assets and investments, you may be concerned about portfolio allocation—getting the highest possible interest for the amount of risk that is taken. Most people know exactly when they would like to retire, so the time horizon is generally known. The challenge is to accumulate as much money as comfortable between now and the established retirement date.
02.06.10 Once you retire, you enter the income stage. Now, instead of trying to obtain enough money to retire, the concern is making your money last as long as you do. The focus of asset allocation becomes a withdrawal allocation—determining which assets to use now, which to withdraw later, and which to save for last. Since none of us knows exactly how long we will live in retirement, we have an unknown time horizon.
02.06.10 You can now move into Rethinking Retirement and this is where with my help, we will rethink new retirement strategies as you become concerned about your retirement futures. Your financial objective now becomes rethinking about your retirement expenses and needs because you may be unsure if you have enough income. Asset allocation now becomes rethinking a portfolio that focuses on long-term guarantees. And the time horizon may involve rethinking retirement income protection vehicles.
02.06.10 In addition, let’s refocus on other basic retirement issues such as: Beneficiary forms. Are they updated and correct? Legacy wants and desires Life insurance – some life insurance policies can guarantee replacement income if either primary wage earner dies. Many families are now typically with two key wage earners. One spouse may need to replace the other’s income during retirement if something were to happen. And finally, let’s discuss health care and long term care potential issues or concerns.
02.06.10 Health care needs are often overlooked when we think about our retirement strategies because we are thinking about our current status with good health. Let’s clean our mental slate and help us rethink the importance of future strategies that do involve health care needs and potential long-term care requirements. For example, it is estimated that median savings needed to cover a couple’s health care costs in retirement in 2018 is [click] $325,000!
02.06.10 We’ve covered a lot of things so lets now shift toward putting it all together and giving you an overview of a common potential situation: What happens if there are gaps between income needs and your asset accumulation?
02.06.10 There are five options for balancing your retirement income and retirement expenses when gaps occur. Lower your expectations for your standard of living in retirement Spend less and save more now in order to have more when you do decide to retire Decide to work longer before you retire or take a part-time job Take on more risk to increase the potential interest on your assets Use a combination of the above options Let’s look at these options and how they might work.
02.06.10 02.06.10 Let’s look at a visual representation of how this works. This is hypothetical and for illustrative and educational purposes only. First, you need a retirement timeline, the period between now and retirement. For our hypothetical illustration, let’s assume 20 years. Next, you need to know how much you’ve already set aside, and what you are currently putting into your retirement programs. The final number is how much money you will need to maintain the standard of living that you desire in retirement. Then, assuming a reasonable rate of return, we hypothetically calculate out how much you could have when they are ready to retire, which becomes the goal number at the top of the graph. If your present savings and contributions to retirement plans meet the goal, there is no need for adjustments. If it doesn’t meet the goal – which is often the case – then it’s time to consider one or more of the five options. Settling for less. Saving more now. Working longer. Taking on more risk. These percentages are for demonstration purposes only. Some people may feel 4% is conservative and others may feel it is aggressive. It is up to you and your qualified professionals or advisors to determine your comfort level for your situation. Or, combination of all the options.
02.06.10 02.06.10 Using a combination of the other four options may be most effective because it allows incremental adjustments in several areas, each of which would be less dramatic than the adjustment that would be required for any one single option on its own. So, even if their retirement reality is not quite what you’d hoped for, you may be able to achieve a satisfactory retirement by: Reducing your expected standard of living slightly Increasing contributions to retirement programs by a small amount Extending your work period by a year or two, and Taking a little more risk (perhaps from conservative to moderate). You must consult your qualified tax advisor for this option.
02.06.10 Start rethinking your retirement today. Lets focus on what you can control by using the worksheet Let’s repair your existing strategies if necessary. Let’s start to rebuild your retirement future together.
02.06.10 To summarize, today we looked at the retirement realities of today We discussed how to help you take action and start by refocusing, repairing, and rebuilding approaches We reviewed several options we can take to help make your retirement realities closer to your retirement dreams. And then finished up with putting it all together.
02.06.10 Any questions?
02.06.10 Thank you for attending rethinking retirement. Any questions? [Set up your own call to action]
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