2. Retirement success is driven by a series of good decisions … ACCESS Will you have access to money as you need it? The foundation of all these good decisions? A good plan. HEALTH CARE How will you defray your medical costs? LEGACY What will your family inherit? How will you create income for life? INCOME
4. 5 steps for establishing your Plan ENVISION your goals Step 1 Step 2 ESTIMATE your expenses Step 3 EVALUATE your resources Step 4 EARMARK guaranteed income ENSURE you are taking action Step 5
6. Planning step 2: ESTIMATE your expenses Just a few key categories to consider: Food _____________ Housing _____________ Transportation _____________ Health Care _____________ Insurance _____________ Personal Care _____________ Basic needs: Monthly estimate ? ? ? ? ? ?
8. Planning step 3: EVALUATE your resources Personal Savings: 40% Pension: 21% Social Security: 39% Employee Benefit Research Group, EBRI Notes, June 2010. Based on 2008 data from the U.S. Census Bureau’s Annual March Current Population Survey.
10. Planning step 4: EARMARK guaranteed income Guaranteed Income $ ________________ Basic Needs $ ________________ Income Gap $ ________________ Earmark - =
13. Sign of a good decision about income You stop working … but your paychecks keep coming.
19. You feel more confident about the short term … and the long term. Sign of a good decision about access to assets
22. Access: Do you have a diverse mix of products? Guarantees are based on the claims-paying ability of the issuing company. Stocks and bonds involve investment risks, including the possible loss of the principal amount invested. Diversification does not guarantee profit nor protect against loss. The MassMutual Single Premium Immediate Annuity (SPIA) Synergy Study, August, 2010. This study is available on MassMutual.com.
23. You feel prepared for the future … whatever it brings. Sign of a good decision about health care
28. What you really pass on to your family is peace of mind. Sign of a good decision about legacy
34. Working with those who can help you build your plan — and your confidence. Sign of a good decision about your retirement?
36. Variable annuities are sold by prospectus. Before purchasing a variable annuity contract, investors should carefully consider the investment objectives, risks, charges and expenses of the variable annuity contract and its underlying investment choices. For this and other information, obtain the prospectuses for the variable annuity contract and its underlying investment choices from your registered representative. Please read the prospectuses carefully before investing or sending money.
37. Principal Underwriters: MML Investors Services, LLC MML Distributors, LLC Subsidiaries of: Massachusetts Mutual Life Insurance Company 1295 State Street Springfield, MA 01111-0001 The information provided is not written or intended as specific tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. MassMutual, its employees and representatives are not authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel. Annuity products are issued by Massachusetts Mutual Life Insurance Company and C.M. Life Insurance Company. C.M. Life Insurance Company, Enfield CT 06082. C.M. Life Insurance Company is a subsidiary of Massachusetts Mutual Life Insurance Company.
What’s the sign of a good decision? Staying up enjoying retirement … not staying up worrying about it.
Your retirement success is driven by a series of good decisions. In planning for retirement, we all face similar questions. But each of our answers will be as unique as we are – based on where we are now and where we want to be later. Reaching those goals will require making a series of good decisions about what’s right for you in these key areas: Income. How will you create income for life? How much of your income should you guarantee? What about inflation? The more efficiently you answer these questions, the fewer resources you’ll need to dedicate to creating income. In turn, that will enable you to keep more of your money available to meet other goals. Access. Will you have access to money as you need it? Over the 20 to 30-plus years your retirement will span, no doubt there will be unexpected challenges – and opportunities – along the way. You’ll need assets readily available to handle the unexpected and still maintain your lifestyle. Health Care. How will you manage medical costs? Thanks to medical advances, people are living longer than ever in history. But the longer we live, the more it may cost to maintain our health or provide for long term care. Plan now to ensure your lifestyle isn’t jeopardized by health care costs. Legacy. What legacy will you leave? For many, the thought of living well includes leaving behind a legacy of financial security. If this is important to you, you’ll also want to explore how to establish a sound estate plan.
It all starts with building a sound retirement plan.
Success of any kind rarely just happens – it’s created by people who take the time to imagine where they want to go and plan how to get there. The same is also true when it comes to creating a sound income plan. A sound plan has to not only address the kind of lifestyle you desire, but it has to be flexible enough to meet your changing needs and must work in both good markets and bad. Consider these five simple steps to establish your own comprehensive income plan. ENVISION the kind of retirement lifestyle you want ESTIMATE how much you’ll need to fund that lifestyle EVALUATE the resources you can tap for income EARMARK guaranteed income to cover your basic needs ENSURE you’re doing as much as you can now to plan for later
Step 1: ENVISION your goals What do you want to do when you retire? What are you looking forward to when you retire? Spending time with your family or hopping the globe? Finally being able to pursue special interests or opening a new business? Never working again or just choosing when and where you want to work? Go ahead. Give yourself permission to envision the lifestyle you really want. It’s the only way you’ll truly be motivated to take the steps necessary to get there.
Step 2: ESTIMATE your expenses Now it’s time to get practical. How much is it going to cost to live the life you want? Keep in mind that some expenses will likely go up in retirement – like health care, insurance and travel. Others may go down, possibly your housing and transportation costs. Of course, it all depends on the lifestyle you choose. But now’s the time to get a good handle on how much you’re likely to need. A good way to start is to estimate the cost of your basic needs, as well as your non-essential lifestyle needs. Basic needs. One way to estimate how much you’ll need for the basics in retirement is to consider how much you spend on the basics now. Take a look at some of the items you may need to estimate in each of these categories. Go through slide.
Discretionary expenses. On to the fun stuff. Imagine that your basic needs are covered. What else is important to you? Estimate what you’d like to have available each month for entertainment, travel, hobbies, or charitable interests. While it’s critical to budget for the basics, you’ll also want to plan for the things that will make your retirement more rewarding.
Step 3: EVALUATE your resources Next question … where is all that money going to come from? As this pie chart illustrates, about half of the income for today’s average retiree comes from Social Security and employer pension plans. The remaining amount comes from personal savings and earnings.
As you inventory your resources, try grouping them into these major categories: • Guaranteed income sources. There are only three sources of income guaranteed to continue for life: Social Security, an employer pension plan (if you’re fortunate enough to have one) and annuities. Annuity guarantees are based on the claims-paying ability of the issuing insurance company. • Part-time/temporary income. Don’t forget about rental income, part-time work or one-time asset sales. • Personal savings and investments. Under this category is your 401(k) or any other employer-sponsored retirement plans, IRAs, bank savings, mutual funds, and individual securities you plan to use for retirement income.
Step 4: EARMARK guaranteed income for your basic needs Once you’ve itemized and grouped expenses and resources, you’re ready to match them up and identify any gaps. Your first priority? Make sure your basic needs will be covered by earmarking guaranteed income to pay for them. That leaves the income generated by your other savings to cover any basic needs gap, as well as your discretionary expenses. You can then match up any temporary income to fund short term or one-time expenses.
The greater the percentage of income that’s guaranteed, the less stress and more security you may have throughout retirement.
Step 5: ENSURE you’re doing everything you can now to plan for later If you’ve identified gaps you could work longer than you might have planned, or work part-time in retirement. You could also try to live on less. But as long as you have some time before you retire, there are several ways you can build more retirement resources now. 1 Save more as soon as possible. The longer your money has to grow, the more you may have to spend later. But it’s never too late to make a difference. 2 Look for additional tax-deferred savings opportunities. The fastest way to build your resources is to protect any earnings from the drain of annual taxes. So you’ll want to maximize the tax-deferred savings vehicles available to you. Make sure you’re contributing as much as possible to any tax-advantaged, employer-sponsored retirement savings plan available to you, as well as your IRA. Then consider deferred annuities, where your payments can keep compounding tax-deferred until you withdraw them. Taxable withdrawals are subject to ordinary income tax and, if made prior to age 59 ½ , may be subject to a 10% federal income tax penalty. Annuities do not provide any additional tax advantage when used to fund a qualified plan. Investors should consider buying an annuity to fund a qualified plan for the annuity’s additional features, such as lifetime income payments and death benefit protection.
Sign of a good decision about income: You stop working. But your paychecks keep coming.
When should you start collecting Social Security? For the foreseeable future, Social Security is still likely to serve as the basis of guaranteed income for many retirees. So, it’s important that you consider how to maximize this lifetime benefit from the government. Many people don’t realize that when they take Social Security it affects how much they get – not just at age 62, but for the rest of their life. As the chart shows, you can increase your lifetime benefit by waiting until at least your “full retirement age” to collect. (This age ranges from 65 to 67, depending on the year you were born.) Each year you wait past that age can increase your Social Security checks even more. Let’s review the chart to compare not just the increase in annual benefits, but the build-up of cumulative benefits by age 90. This is an important consideration as you may spend 30 or more years in retirement.
How can you turn other savings into more guaranteed income? There is only one other way you can increase your guaranteed income. You can use a portion of your savings to purchase an annuity – the only financial vehicle you can purchase that can help you actually turn your savings into guaranteed income. Guarantees and lifetime income payments are based on the claims-paying ability of the issuing company. Different types of annuities to consider. There are two basic categories of annuities. Which type may be right for you depends on when you need income: • An income annuity, also known as a Single Premium Immediate Annuity (SPIA) turns a one-time purchase payment into a series of regular income payments. • A deferred annuity is a long-term investment designed for retirement. It allows your assets to accumulate tax-deferred over time. Then, when you’re ready to retire, it can turn those assets into regular income payments. With either type of annuity, you can choose whether you want your guaranteed income to continue for a certain period of time or for the rest of your life. You can even choose to have a steam of guaranteed income continue for your spouse if he or she outlives you.
What other options do you have for generating income? Once you’ve bridged the gap between your basic needs and your guaranteed income, you can focus your attention on efficiently structuring regular income from your other resources – even though that income won’t be guaranteed. Are your assets saved in bank accounts, invested in retirement plans or tied up in your home equity? Regardless of where those assets are, there are a variety of ways to transform them into income when you retire. Some of the most common withdrawal strategies are highlighted on this slide. Which option, or combination of options, is right for you depends on a number of factors, like your desire for growth, your need for security and your preference for liquidity. May affect the security of your home; even if the value of your home decreases, the loan amount does not. A reverse mortgage can impact your ability to leave a legacy and reduce your choices during your lifetime. Using the equity in your home as collateral for a line of credit/loan or taking out a reverse mortgage Security of knowing when your income will “come due,” but not much opportunity for growth to outpace inflation. Purchasing a series of bonds with different maturity dates, thus staggering the return of your principal Continued opportunity for growth; access to other assets when needed, but no guarantees your income will last for life. Withdrawing a certain percentage from your account on a regular basis You need a substantial base to generate meaningful income and it may not outpace inflation over time. This strategy may not provide the same level of income as other strategies. Taking only the interest generated by bonds and/or the dividends from stocks Considerations Description
How much can you withdraw each year? Whichever withdrawal strategy you employ, you’ll need to temper your withdrawal rates. If you don’t, you risk running out of money long before you’ve run out of bills. Since most retirees don’t have the opportunity to “re-make” what they’ve earned over the years, you’ll need to preserve what you’ve accumulated. That starts with deciding what percentage of your assets you can afford to withdraw each year. Be sure to balance your withdrawal rate with your investment strategy. Invest too conservatively and chances are you won’t have enough growth to outpace even a low withdrawal rate over time. But opt for a balanced investment strategy and a low withdrawal rate, and you may have a much better chance of sustaining income for life. This table shows how the amount of withdrawal and various portfolio allocations can affect the chance of meeting income needs over a 25-year retirement. It is assumed that a person retires at year zero and withdraws an inflation-adjusted percentage of the initial portfolio each year beginning in year 1.
Another way to extend your portfolio’s life span is to strategically decide which resources to withdraw first. Again, your financial professional can tailor your strategy, but in general, you may want to withdraw from your least tax-advantaged resources first: • Taxable investments – like mutual funds; • Tax-deferred plans – like your employer’s retirement savings accounts, IRAs and annuities; • Tax-free sources – like Roth IRAs. This ordering allows you to extend the time your tax advantaged assets can compound – which, in turn, can boost the income they can generate over time. Keep in mind, this is a general rule of thumb. Specific circumstances, such as a tax rate increase or wealth transfer goals that include highly appreciated taxable investments, are just two examples of things that may impact your decision. You should always consult with your tax advisor to help you determine what might be your most tax-efficient withdrawal strategy.
Sign of a good decision about access: You feel more confident about the short term … and the long term.
Access Will you have access to money when you need it? Think back over the last 30 years. Have there been any unexpected twists and turns? Times when you needed extra cash to cover an emergency or seize an opportunity? Now imagine the next 30 years. Chances are retirement, too, will have its share of surprises. While you can’t predict what will happen, you can prepare by having assets readily available in your retirement plan. Can you fund emergencies without jeopardizing your lifestyle? First things first. You need to make sure you have ready access to funds just in case you need them. And if you do need to take short term withdrawals, you need to be confident you won’t be jeopardizing your long term financial security. So how do you accomplish that? One way is to keep a small portion of your retirement assets in a liquid account, earmarked for emergency needs. That way you can withdraw your money if needed – without affecting your overall investment strategy.
Are your investments diversified for liquidity and growth? It used to be conventional wisdom that as you neared retirement, you needed to move your money into safe, conservative investments. But now that retirements can span three decades, that’s no longer the “safe” thing to do. If you don’t keep at least some of your assets invested for growth, your income won’t continue to outpace inflation. And if your buying power is weakened, you won’t be able to maintain the lifestyle you want. So here’s the new retirement reality. It’s critical that you continue to diversify your investments. Now’s the perfect time to work with your financial professional to review your allocation strategy and make sure you have a good mix of asset classes. Asset allocation and diversification do not assure a profit and do not protect against a loss in a declining market.
Do you have a diverse mix of products to provide liquidity, growth and guaranteed income? As you move into retirement, it’s not enough to diversify your investment mix. You also need to diversify your product mix. By introducing guaranteed product solutions to your retirement portfolio, you can take some level of risk off the table. These guaranteed products can be used to address specific needs. Annuities can guarantee lifetime income and life insurance can guarantee your legacy wishes, while other insurance products may be used to ensure your health care needs. Guarantees are based on the claims-paying ability of the issuing company. MassMutual has conducted research that shows when a variety of product and planning techniques are combined to meet each individual’s unique needs, the whole can be stronger than the sum of the parts. Our research analyzed new planning approaches and strategies that combine single premium immediate annuities with other planning techniques to create retirement income strategies. An income annuity immediately generates a guaranteed stream of regular payments. Since this strategy calls for increasing annuity benefits each year, you’ll be guaranteeing more and more of your retirement income as you age, thereby increasing your income security. As your guaranteed income builds, you can also reduce the amount you need to withdraw from your other investments each year. Since you won’t be depending on those investments for income, you may be more confident investing them more aggressively for long term growth potential or using them to purchase guaranteed products to meet other needs.
Sign of a good decision about health care: You’ll feel prepared for the future … whatever it brings.
Assuming Medicare benefits remain at their current levels, a couple will need approximately $300,000 to $650,000 to cover their health care expenses in retirement. No wonder health care costs rank as one of retirees’ biggest financial concerns. But the sooner you plan for this cost, the better you’ll feel about your retirement security.
What will Medicare cover? One way to manage part of the costs of your retirement health care is to effectively utilize Medicare, the federal government’s health insurance plan primarily designed for those age 65 and over. As long as you’ve entered the United States legally and have been here for at least five years, you’re eligible for Medicare. What’s covered under your Medicare plan depends on which of the Medicare “parts” you have.
Do you need Medigap insurance? Medicare – Part A, Part B or both – doesn’t cover the total cost of most medical services or supplies. Given that those out-of-pocket costs could severely affect your lifestyle, you may want to buy a Medigap insurance policy, offered by a number of health insurers. As its name implies, Medigap insurance policies are literally designed to help bridge the gap between your retiree health care costs and your Medicare benefits. One of the best times to buy a Medigap policy is during the “open enrollment period.” That period is generally within the first six months of turning age 65, although its definition differs by state. If you apply within open enrollment, there is no medical underwriting, which means you can’t be refused a policy, forced to wait for your coverage or even charged more because of any health problems. Although Medigap policies used to cover prescription drugs, no new Medigap policies can cover these costs. You may want to join a Medicare Prescription Drug Plan offered by private companies approved by Medicare.
Long term care expenses are one of the largest unfunded potential liabilities facing today’s retirees and soon-to-be retirees. These types of large expenses could have a significant impact on a retirement portfolio and your ability to create meaningful income for life. Long-term care insurance could potentially be a solution. Please consult an insurance agent who specializes in long-term care insurance for complete details prior to purchasing a policy.
Sign of a good decision about legacy: What you really pass on to your family – peace of mind.
So far we’ve been discussing retirement success in terms of what it means to your income. Now let’s explore what it means to your family. Wouldn’t you like to know that if something happened to you, your family would be taken care of? That they wouldn’t have to worry about making ends meet … or be forced to sell off assets to pay estate taxes … or sacrifice their own long term goals to meet short term expenses? That’s the kind of peace of mind you gain – and pass on – by integrating legacy planning into your retirement strategy. Here are the next series of good decisions that will drive your retirement success. How should you start planning for your legacy? One of the best ways to begin the legacy planning process is to inventory all your assets. Make a list of everything you own, including: • real estate/other types of property; • business interests; • employer-sponsored retirement plans; • bank accounts; • brokerage and mutual fund accounts; • Traditional, Roth and Rollover IRA accounts; and • insurance policies and annuities. Next to each asset, write down account numbers and other pertinent data. Locate any legal papers, like deeds and contracts. Then, place all this information in safekeeping for your heirs, possibly in a safety deposit box.
Do you need a will? Yes you do, and here’s why: A will is a legal document that directs the disposition of assets after your death. Without a will, you would be leaving all decisions concerning your assets to the discretion of the laws of the state having jurisdiction over your estate. This can be both emotionally and physically draining for your heirs.
Are your beneficiary designations updated? Not all assets are distributed by a will. Whatever your will says, certain types of assets are passed on to the beneficiary listed on the account, like employer-sponsored retirement plans, annuities and life insurance. So it’s critical to keep your beneficiary designations current. Imagine your youngest child not inheriting any of your 401(k) savings simply because you never added them as a beneficiary. Take the time now to check your designations and adjust as needed.
Do you have enough life insurance? Life insurance is one key asset that passes directly to your beneficiaries income tax-free, without the costly delays of probate. It insures your family has immediate access to cash when they need it most, so they’re not forced to liquidate other resources quickly to meet expenses, pay estate taxes or fund longer term goals. Planning for retirement is also an opportune time to review your insurance policies. Do you have enough financial protection? The right type of coverage? The right beneficiaries named? Your financial professional can help review your family’s financial obligations and make sure they are properly covered by life insurance.
Should you consider trusts? Trusts are not just for the wealthy. They can be extremely useful to anyone who wants to put conditions on how and when their assets will be distributed after their death. Trusts can also help you reduce your estate taxes and transfer assets outside of the public glare and delay of probate court. Some even provide greater protection of your assets from creditors and lawsuits. Now’s the time to consult with your legal and financial professionals to see whether trusts can help you accomplish your specific goals. How can you give more efficiently to the charities that mean the most to you? Another way to maximize what’s passed on in benefits while minimizing what’s paid out in taxes is to integrate charitable giving into your legacy planning. There are many gifting strategies to address different types of charitable goals. Ask your legal and financial professionals for more details on the most income tax-efficient and estate-planning friendly ways to gift or donate assets.
What’s the sign of a good decision? Working with those who can help build your plan — and your confidence.
Some of the things we’ve discussed today can seem complicated, but with some guidance you too can make good decisions that meet your needs. Please feel free to set up an appointment today so we can discuss your situation. From there, I can help you tailor a plan that meets your objectives including: Income, access, health care and legacy.