Building Better Retirement PortfoliosLWI Financial Inc. (“Loring Ward”) is an investment adviser registered with the Securities and Exchange Commission. Securities transactions may be offered through Loring Ward Securities Inc., an affiliate, member FINRA/SIPC. B 12-006 (02/12) Implementing a Distribution Portfolio Series does not guarantee a profit or protect against a loss.
Agenda• Retirement Risks & Challenges• Traditional Approaches• Total Return Portfolio Strategy• Managing Cash Flow and Emotions
Risks & Challenges for the Next Generation of Retirees• Inflation… rising health care costs• Longevity… increasing life expectancy• Lifestyle… higher income replacement needs• Funding… more personal responsibility• Investment… volatility & uncertainty
Lifestyle Risk: Higher Income Replacement Needs• Retirees should generally plan for 100% income replacement vs. 70% rule of thumb used in the past• Retirees are remaining healthier longer — healthy living is more expensive• Retirees have more time — time costs money
Probability of Meeting Income Needs Various withdrawal rates 87% 98% 96% 93% 90% 4% and portfolio allocations over a 25-year retirement 38% 75% 82% 81% 79% 5% IMPORTANT: Projections generated by Morningstar regarding the likelihood of various investment outcomes are hypothetical Withdrawal Rate in nature, do not reflect actual investment results, and are not guarantees of future results. Results may vary over time and 6% with each simulation. This is for illustrative purposes only and not 5% 31% 56% 64% 65% indicative of any investment. An investment cannot be made directly in an index. “A limitation of this simulation model is that it assumes a constant inflation-adjusted rate of withdrawal, which may not be representative of actual retirement income needs. This type of 0% 6% 30% 45% 51% 7% simulation also assumes that the distribution of returns is normal. Should actual returns not follow this pattern, results may vary. Stocks in this example are represented by the Standard & Poor’s 500®, which is an unmanaged group of securities and considered to 0% 0% 13% 29% 39% 8% be representative of the stock market in general. Bonds are represented by the five-year U.S. government bond, inflation by the Consumer Price Index and mutual fund expenses from Morningstar. An investment cannot be made directly in an index. The data 100% 75% B 50% B 25% B 100% assumes reinvestment of income and does not account for taxes Bonds 25% S 50% S 75% S Stocks Government bonds are guaranteed by the full faith and credit of the United States government as to the timely payment of principal and interest, while returns and principal invested in stocks are not guaranteed.The stocks in this example are represented by the Standard & Poor’s500 Index. The bonds in this example are represented by the FiveYear U.S. Government Bond.
Total Returns vs. Income Portfolio Strategy• Short-term bonds seeking to reduce portfolio volatility, not primarily to provide income• Equity allocations to help support long-term growth• Global diversification seeking to reduce volatility• Potentially increase expected returns with small cap and value stocks• Synthetic dividend for paycheckRisks associated with investing in stocks potentially include increased volatility and loss of principal.Small company stocks may be less liquid than large company stocks. Bonds are subject to certainrisks, including interest rate risk which can decrease the value of a bond as interest rates rise.Principal value, bond prices and investment returns fluctuate with changes in market conditions, sothat bonds, when redeemed or sold, may be worth more or less than their original cost. Diversificationdoes not guarantee a profit or protect against a loss in a declining market.
Managing Cash Flow & ConfidenceA “Synthetic Dividend”• Total return portfolio designed to deliver a “synthetic dividend” or total portfolio earnings vs. only dividends and interest income to fund retirement cash flow needs• Money is money, whether it comes from income or capital gains• May be more tax efficient to generate and spend long-term capital gains than dividends and interest
Managing Cash Flow & Confidence• Cash flow reserve is maintained with at least 1 year of retirement Cash Flow spending needs Reserve• Additional 2 years of spending in short-term The Total fixed income to Portfolio The potentially insulate from Investment market Portfolio• Avoids perception of “dipping into capital” or taking losses from investment portfolio
Managing Cash Flow & Confidence• Cash reserve funded with cash dividends Cash Flow Rebalance• Difference between Refill Reserve spending and dividends funding through annual The Total rebalancing mid year Regular Portfolio Monthly• Any positive return of Payments equities (excess over target allocation) is sold and proceeds invested in cash to meet future withdrawal requirementsThe buying and selling of securities for the purpose of rebalancing may have adversetax consequences.
Advantages of the Distribution Portfolio SeriesDesigned to Provide:• Addresses potential short-term emotional responses• Better management of inflation risk• Improved sustainability of withdrawals
Different types of investments and/or investment strategies involve varyinglevels of risk, and there can be no assurance that any specific investment orinvestment strategy will be either suitable or profitable for your portfolio. Youand your advisor should carefully consider your suitability depending on yourfinancial situation.Higher potential return generally involves greater risk, short term volatility is notuncommon when investing in various types of funds including but not limited to:sector, emerging markets, small and mid-cap funds. International investinginvolves special risks such as currency fluctuation, lower liquidity, political andeconomic uncertainties, and differences in accounting standards. Risks of foreigninvesting are generally intensified for investments in emerging markets. Risks foremerging markets include risks relating to the relatively smaller size and lesserliquidity of these markets, high inflation rates and adverse politicaldevelopments. Risks for investing in international equity include foreign currencyrisk, as well as, fluctuation due to economic or political actions of foreigngovernments and/or less regulated or liquid markets. Risks for smallercompanies include business risks, significant stock price fluctuation andilliquidity. Treasuries and government securities are guaranteed by thegovernment for repayment of principal and interest if held to maturity.