8 Key Risks of Retirement Planning
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8 Key Risks of Retirement Planning 8 Key Risks of Retirement Planning Presentation Transcript

  • ADDRESSING R.I.S.K.  BUILDING YOUR RETIREMENT INCOME SURVIVAL KIT RETHINKING INCOME SIMPLIFYING COMPLEXITY Copyright © 2011 ValMark Securities Inc. All Rights Reserved.
  • TABLE OF CONTENTS • Risk Defined • Traditional Planning • Key Risks of Retirement • Building Your R.I.S.K™Copyright © 2011 ValMark Securities Inc. All Rights Reserved.
  • RISK DEFINEDCopyright © 2011 ValMark Securities Inc. All Rights Reserved.
  • Risk: the potential to experience injury or lossCopyright © 2011 ValMark Securities Inc. All Rights Reserved.
  • RISK DEFINED PERSONAL PENSIONS ARE DISAPPEARING:  “PBGC takes control of underfunded pension of Toyota and GM. Pension plan was only 55% funded with $161 million in assets and $292 million in liabilities” -Wall Street Journal (March 3, 2010)  “Californias public pension funds are underfunded by as much as $500 billion, according to a Stanford University study that was commissioned by Gov. Arnold Schwarzenegger and released Monday.” -CBS (April 5, 2010)  “The future ain’t what it used to be!” - Yogi BerraCopyright © 2011 ValMark Securities Inc. All Rights Reserved.
  • RISK DEFINED PERSONAL PENSIONS ARE DISAPPEARING:Copyright © 2011 ValMark Securities Inc. All Rights Reserved.
  • RISK DEFINED NUMBER OF U.S. RETIREES PER 100 WORKERS: Year Number 1950 6 1970 27 1990 30 2010 (est.) 32 2030 (est.) 46 Data Source: Social Security Administration, “The 2007 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds,” p.48.Copyright © 2011 ValMark Securities Inc. All Rights Reserved.
  • RISK DEFINED Conclusion  Guaranteed income streams for life are no longer handed to us at retirement.  Planning for financial security in retirement is a burden now falling directly on our own shoulders.  How can we effectively prepare and plan for retirement? Copyright © 2011 ValMark Securities Inc. All Rights Reserved.
  • TRADITIONAL PLANNINGCopyright © 2011 ValMark Securities Inc. All Rights Reserved.
  • T R A D I T I O N A L T H O U G H T – A S S E T A L L O C AT I O N TRADITIONAL PLANNING Large Cap Mid Cap Small Cap Bonds International ACCUMULATION PHASE: ASSET ALLOCATIONCopyright © 2011 ValMark Securities Inc. All Rights Reserved.
  • T R A D I T I O N A L T H O U G H T – A S S E T A L L O C AT I O N TRADITIONAL PLANNING WHAT IS THE ULTIMATE GOAL?Copyright © 2011 ValMark Securities Inc. All Rights Reserved.
  • T R A D I T I O N A L T H O U G H T – A S S E T A L L O C AT I O N TRADITIONAL PLANNING To Reach the Top? To Reach the Top… or …and Return Safely 80% of climbing accidents occur on the descent!Copyright © 2011 ValMark Securities Inc. All Rights Reserved.
  • The same is true for retirement planning The goal of saving for retirement is not merely to accumulate assets (“climbing to the top”) …but to use these saved assets to create lifelong income enabling us to live the kind of life we desire to throughout retirement (“making it back down safely”)Copyright © 2011 ValMark Securities Inc. All Rights Reserved.
  • T R A D I T I O N A L T H O U G H T – A S S E T A L L O C AT I O N THE GREAT TRANSITION “It’s time to take my savings and turn it into income that I can rely on for the rest of my life.“Copyright © 2011 ValMark Securities Inc. All Rights Reserved.
  • The risks we face saving for retirement are different than the risks we face during retirement.Copyright © 2011 ValMark Securities Inc. All Rights Reserved.
  • TRADITIONAL PLANNING Conclusion  Traditional retirement planning focuses mostly on asset allocation and saving for retirement.  The ultimate goal of retirement planning is to transition savings into life-long, sustainable income streams to satisfy our Needs and Wants throughout retirement.  In order to be successful, we must proactively reassess the assets we have saved for retirement and redeploy them in a way that will address the Key Risks of Retirement (i.e. come back down the mountain safely). Copyright © 2011 ValMark Securities Inc. All Rights Reserved.
  • KEY RISKS OF RETIREMENTCopyright © 2011 ValMark Securities Inc. All Rights Reserved.
  • KEY RISKS OF RETIREMENT Retirement survival requires the following risks to be addressed:  Market  Inflation  Sequence of Return  Liquidity  Longevity  Taxation  Health  LegacyCopyright © 2011 ValMark Securities Inc. All Rights Reserved.
  • KEY RISKS OF RETIREMENT Percent of consumers very or extremely anxious over specific retirement risks: Social security benefits 41% Interest rates 49% Longevity 49% Lack of guaranteed income 49% Market risk 53% Health expenses 56% Inflation/tax increases 61% Source: McKinsey & Company 2007 Consumer Retirement SurveyCopyright © 2011 ValMark Securities Inc. All Rights Reserved.
  • MARKET RISKCopyright © 2011 ValMark Securities Inc. All Rights Reserved.
  • MARKET RISK 35 Years 2009: +26.5% 2003: +28.7% 58 positive years: Average 1999: +21.0% positive return 21.45% 1998: +28.6% 1997: +33.4% 1996: +23.1% 1995: +37.4% Positive versus negative average annual 1991: +30.6% 1989: +31.5% returns for the S&P 500 Index: 1929-2010 1986: +18.5% 1985: +32.2% 1983: +22.5% 1982: +21.4% 1980: +32.4% 1979: +18.4% 1976: +23.8% 1975: +37.2% 1972: +19.0% 1967: +24.0% 1963: +22.8% 1961: +26.9% 1958: +43.4% 1955: +31.6% 1954: +52.6% Average Annual Return: 11.2% 1952: +18.4% 1951: +24.0% 1950: +31.7% 8 Years 1949: +18.8% 2007: +5.5% 7 Years 7 Years 1945: +36.4% 24 negative years: Average 2005: +4.9% 2004: +10.9% 2010: +15.1% 1944: +19.8% negative return -13.61% 1994: +1.3% 1993: +10.0% 2006: +15.8% 1943: +26.0% 1987: +5.2% 1992: +7.7% 1988: +16.8% 1942: +20.3% Down Down Down 1970: +4.0% 1984: +6.3% 1971: +14.3% 1938: +31.1% Down 18%+ 12%-18% 6%-12% 1960: +0.5% 1978: +6.6% 1965: +12.5% 1936: +33.9% 0%-6% 1948: +5.5% 1968: +11.1% 1964: +16.5% 1935: +47.7% 1947: +5.7% 1956: +6.6% 1959: +12.0% 1933: +54.0%2008: -36.9% 1973: -14.7% 2001: -11.9% 1990: -3.2% Up UP Up Up2002: -22.1% 1 Year 2000: -9.1% 1981: -4.9% 0%-6% 6%-12% 12%-18% 18%+1974: -26.5% 1977: -7.2% 1953: -1.0%1937: -35.0% 1969: -8.5% 1939: -0.4% Sources: Thomson Investment View and Standard & Poor’s (S&P), a division of The1931: -43.3% 1966: -10.1% 1934: -1.4% McGraw-Hill Companies, Inc. Each calendar year listed in chart reflects average annual1930: -24.9% 1962: -8.7% 5 Years performance from 12/31 of prior year to 12/31 of listed year. 6 Years 1957: -10.8% 1946: -8.1% The Standard & Poor’s (S&P) 500 Index is an unmanaged index that tracks the 1941: -11.6% performance of 500 widely held, large-capitalization U.S. stocks. Indices are not managed 1940: -9.8% and do not incur fees or expenses. It is not possible to invest directly in an index. Past 1932: -8.2% performance is not a guarantee or indication of future results. Individual results may vary 1929: -8.4% 12 Years Copyright © 2011 ValMark Securities Inc. All Rights Reserved.
  • MARKET RISK Equities – The Necessary Evil  Equity exposure is typically needed to reach certain retirement objectives.  Equities have historically been relied upon to be a powerful growth vehicle and inflation hedge.  However, Market Risk, if not addressed, could wipe out your entire portfolio before or during retirement.Copyright © 2011 ValMark Securities Inc. All Rights Reserved.
  • SEQUENCE OF RETURN RISKCopyright © 2011 ValMark Securities Inc. All Rights Reserved.
  • SEQUENCE OF RETURN RISK  It is not important when buying and holding (average returns work just fine for accumulation).  Once you start withdrawing money in retirement (distribution), average returns are irrelevant.  Example: “If the market averaged 7% annually, I can safely assume that a 5% withdrawal rate is sustainable throughout retirement.”Copyright © 2011 ValMark Securities Inc. All Rights Reserved.
  • SEQUENCE OF RETURNS RISK SEQUENCE OF RETURN RISK $1.2M Hypothetical zero balance: age 97 Retirement age $1M 60 years old Investment $1,000,000 $0.8 Distributions 1) 7% $50,000 every year, $0.6 increased annually for 3.5% inflation $0.4 7% This is a hypothetical example and is not 3) 7% 2) 7% intended to project the performance of any $0.2 specific investment. $0 60 70 80 90 100 ageCopyright © 2011 ValMark Securities Inc. All Rights Reserved.
  • SEQUENCE OF RETURN RISK $1.2M Hypothetical zero balance: age 97 Retirement age $1M 60 years old Investment $1,000,000 $0.8 Distributions zero balance: age 91 $50,000 every year, $0.6 increased annually for 3.5% inflation 1) 7% $0.4 This is a hypothetical example and is not intended to project the 7% performance of any $0.2 specific investment. 3) -13% 2) 27% $0 60 70 80 90 100 ageCopyright © 2011 ValMark Securities Inc. All Rights Reserved.
  • SEQUENCE OF RETURN RISK $1.2M Hypothetical zero balance: age 97 Retirement age $1M 60 years old Investment $1,000,000 $0.8 Distributions zero balance: age 91 1) 7% $50,000 every year, $0.6 increased annually for 3.5% inflation This is a hypothetical $0.4 7% example and is not intended to project the 3) 27% 2) -13% performance of any $0.2 specific investment. zero balance: age 86 $0 60 70 80 90 100 ageCopyright © 2011 ValMark Securities Inc. All Rights Reserved.
  • SEQUENCE OF RETURN RISK  If sequence of return risk is not addressed, then successful retirement depends on being lucky enough to retire in the right years.  A solution must be used that facilitates enough market/equity exposure necessary to reach asset accumulation goals, while still allowing for sustainable withdrawal rates from the portfolio regardless of return sequence in retirement.Copyright © 2011 ValMark Securities Inc. All Rights Reserved.
  • LONGEVITY RISKCopyright © 2011 ValMark Securities Inc. All Rights Reserved.
  • LONGEVITY RISK  Advances in medicine, technology and increased awareness of healthy living increase life expectancy.  Life expectancy is the halfway point (50% will live beyond this number).  Retirement planning should focus on the probability of survival (outliving income is a legitimate risk).  Optimized retirement portfolios typically have a lifetime income component because predicting death is impossible. Source: Tools & Techniques, Life Settlement Planning – 2008Copyright © 2011 ValMark Securities Inc. All Rights Reserved.
  • SLONGEVITY RISK EQUENCE OF RETURN RISK At least one Age Female Male member of the couple surviving 70 93.90% 92.20% 99.50% Probability of 75 80 85% 72.30% 81.30% 65.90% 97.20% 90.60% Survival at age 65 85 90 55.80% 34.80% 45.50% 23.70% 75.90% 50.30% 95 15.60% 7.70% 22.10% 100 5% 1.40% 6.30% 100.00% 90.00% Female 80.00% 70.00% 60.00% Male 50.00% 40.00% At least one 30.00% member of the 20.00% couple surviving 10.00% 0.00% 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99100 Source: RP2000 Mortality table; IFID Centre calculationsCopyright © 2011 ValMark Securities Inc. All Rights Reserved.
  • LONGEVITY RISK • Table compares the different portfolios 30 – Year Retirement Stock / Bond Mix probability of funding retirements 100/0 80/20 60/40 40/60 20/80 for 30 years. Initial Withdrawal Amount 3% 94% 97% 98% 99% 99% • Careful evaluation of your asset 4% 83% 86% 89% 91% 92% allocation and initial withdrawal 5% 67% 69% 68% 63% 49% Initial Withdrawal Amount amount in retirement is vital. 6% 50% 49% 42% 29% 10% • Each Initial 7% 35% 31% 22% 9% 1% withdrawal assumes a 3% inflation rate. 8% 24% 18% 10% 2% 0% This is a hypothetical example for illustrative purposes onlyCopyright © 2011 ValMark Securities Inc. All Rights Reserved.
  • HEALTH RISKCopyright © 2011 ValMark Securities Inc. All Rights Reserved.
  • HEALTH RISK  Health care costs are growing twice as fast as general inflation.1  2 out of every 3 people age 65 and older will need some form of long term care in their lifetime.2  Health care cost without long term care expenses is the second biggest expense for retirees, averaging about 20% of the couples total monthly expenses.3  About 75 percent of single people and 50 percent of all couples spend all their savings within one year of entering a nursing home.4 1 Fidelity, Investment News- Health-Care Expenses in Retirement Surge , March 13, 2006 . 2 “Americans Fail to Act on Long-Term Care Protection,” The American Society on Aging, May 2003. 3 Are retirees health costs as steep as some say? Market Watch, March 25, 2010 4 Long Term Care Insurance Tree ,September 2009.Copyright © 2011 ValMark Securities Inc. All Rights Reserved.
  • HEALTH RISK Nursing home national average: $66,850 Nursing home national range: $44,553 – $189,891 Source: Genworth 2009 Cost of Care SurveyCopyright © 2011 ValMark Securities Inc. All Rights Reserved.
  • HEALTH RISK IMPLICATIONS:  The majority of people 65 and over will need long term care and the cost of such care is increasing.1  Protecting against these costs is crucial to retirement security. 2  It’s all about you – personal facts require custom planning. 1 “Americans Fail to Act on Long-Term Care Protection,” The American Society on Aging, May 2003. 2 Long Term Care Insurance Tree ,September 2009Copyright © 2011 ValMark Securities Inc. All Rights Reserved.
  • INFLATION RISK “Inflation is the one form of taxation that can be imposed without legislation.” - Milton Friedman, EconomistCopyright © 2011 ValMark Securities Inc. All Rights Reserved.
  • INFLATION RISK • “Inflation has superseded health care risk as the top concern of both retirees and pre-retirees. 58% are very or somewhat concerned and 71%, up from 63% percent in 2007, express concern that the value of their savings and investments might not keep pace with inflation.” -2009 Risks & Process of Retirement Survey Report of Findings Sponsored by the Society of Actuaries (March, 2010) • The Elderly Spend Differently: Transportation : -29.3% Recreation: -21% Health Care: 117% Housing: 23.5% Food & Beverage: -24.2% Education: -41.3% Apparel: -41.3% -60% -40% -20% 0% 20% 40% 60% 80% 100% 120% Data Source: Bureau of Labor Statistics data to end of 2006; IFID Centre calculationsCopyright © 2011 ValMark Securities Inc. All Rights Reserved.
  • LIQUIDITY RISKCopyright © 2011 ValMark Securities Inc. All Rights Reserved.
  • LIQUIDITY RISK  Change is the one constant we can count on.  Even the best retirement income planning strategy is vulnerable if flexibility is not incorporated to address unexpected events.  Retirement has witnessed many “poor” millionaires.Copyright © 2011 ValMark Securities Inc. All Rights Reserved.
  • TAXATION RISKCopyright © 2011 ValMark Securities Inc. All Rights Reserved.
  • TAXATION RISK Sources: taxfoundation.org, 2009 (IRS), usgovernmentspending.com (U.S. budget data and U.S. Census reports)Copyright © 2011 ValMark Securities Inc. All Rights Reserved.
  • TAXATION RISK  Taxation risk impacts the planning process for addressing the other key retirement risks  The decisions we make today “eliminate” or “create” opportunities for mitigating taxes in the futureCopyright © 2011 ValMark Securities Inc. All Rights Reserved.
  • LEGACY RISKCopyright © 2011 ValMark Securities Inc. All Rights Reserved.
  • LEGACY RISK  The risk of not being able to leave a financial legacy to the people or organizations we care about most  Making a conscious decision to maximize Lifestyle or Legacy is an important part of planning for retirement  Once the decision is made, the retirement income strategy should be crafted with this goal in mindCopyright © 2011 ValMark Securities Inc. All Rights Reserved.
  • KEY RETIREMENT RISKS Conclusion  We are faced with unique risks in retirement that must each be addressed.  Designing an overall portfolio comprised of complimenting income allocations is necessary to effectively manage these risks.  What is the best process for building an optimized retirement portfolio? Copyright © 2011 ValMark Securities Inc. All Rights Reserved.
  • BUILDING YOUR R.I.S.K™ “Portfolio optimization is not a single point-in-time solution, but a process that is executed over time.” The Challenge of Optimal Retirement Portfolios, Garth A. Bernard (January 2009)Copyright © 2011 ValMark Securities Inc. All Rights Reserved.
  • T R A D I T I O N A L T H O U G H T – A S S E T A L L O C AT I O N RETIREMENT PLANNING MYTHS  Myth#1: Effective asset allocation explains 95% of investment performance in retirement  As we get closer to retirement, I believe that asset allocation takes on a more limited role, compared to the much more important and critical decision of suitable product (income) allocation.” - Moshe Milevsky Ph.D, Schulich School of Business, York University  Myth#2: The most import thing to focus on in planning for retirement is accumulating enough assets (i.e. What’s Your Number?)  The most important thing about retirement is not just accumulating a lump sum of money, but turning this money into an annual, life-long income streams (i.e. making it back down the mountain safely)…. “What’s Your Percentage?”  Myth#3: The risks we face saving for retirement are the same ones we face during retirement.  Unique risks will fight against retirement income once we begin the distribution phaseCopyright © 2011 ValMark Securities Inc. All Rights Reserved.
  • T R A D I T I O N A L T H O U G H T – A S S E T A L L O C AT I O N BUILDING YOUR R.I.S.K™ • “Any income allocation strategy that does not export all of the longevity, LTC, market and inflation risks will likely fail." – Jim Otar, Unveiling the Retirement Myth • “Ive run thousands of simulations of hypothetical retirements and ranked what can go wrong. Far and away the biggest causes of failure are longevity risk, inflation and a sour market early in retirement. No one kind of investment works against all three. So you need to diversify among investment products, just as you need to diversify among stocks and bonds and so on.” – Moshe Milevsky Ph.D, Schulich School of Business, York UniversityCopyright © 2011 ValMark Securities Inc. All Rights Reserved.
  • BUILDING YOUR R.I.S.K™ “Individuals, largely due to a lack of awareness and education about these more optimal ways to deploy a portion of their retirement assets, often end up deploying assets less efficiently than possible to achieve the financial objective of maximizing income while minimizing the probability of outliving it.” - Jeffrey K. Dellinger, FSA, MAAA – “Efficient Deployment of Retirement Assets to Increase Financial Security of Seniors and to Minimize Welfare Burden on State” September 2007Copyright © 2011 ValMark Securities Inc. All Rights Reserved.
  • T R A D I T I O N A L T H O U G H T – A S S E T A L L O C AT I O N THE 3 CORE PLANNING PRINCIPLES TRANSITION FROM ASSET ALLOCATION TO INCOME ALLOCATION 1 Effectively transition your retirement savings accumulation strategies to distribution strategies. DETERMINE YOUR WITHDRAWAL PERCENTAGE 2 Determine the percentage of savings you can withdraw as income each year so it is sustainable throughout retirement. ADDRESS RISK 3 Ensure that your annual income streams are protected against the key risks you will face during retirement.Copyright © 2011 ValMark Securities Inc. All Rights Reserved.
  • BUILDING YOUR R.I.S.K.™ Transfer Reduce (Optimize, Mitigate) (Share or Insure) Retain Avoid (Accept and Budget) (Eliminate, Withdraw)Copyright © 2011 ValMark Securities Inc. All Rights Reserved.
  • Copyright © 2011 ValMark Securities Inc. All Rights Reserved.
  • THE R.I.S.K. PROCESS™  The R.I.S.K. Process™ is a 6 step turn-key program designed to help you address the Key Retirement Risks by building your own custom Retirement Income Survival Kit (R.I.S.K.)™Copyright © 2011 ValMark Securities Inc. All Rights Reserved.
  • THE R.I.S.K. PROCESS™Copyright © 2011 ValMark Securities Inc. All Rights Reserved.
  • ADDRESSING R.I.S.K.™ Conclusion  We are faced with a retirement crises. Lifelong income streams are no longer handed to us at retirement.  Traditional planning focuses on asset allocation. This is great for accumulation. However, distribution planning requires us to develop proactive income allocation strategies.  In order to “Make It Back Down the Mountain Safely,” these income strategies must work together to address Key Retirement Risks.  It is helpful to use a process to make this great transition. The process should incorporate complimenting income distribution strategies built upon sustainable withdrawal rates that work together to address Key Retirement Risks. Copyright © 2011 ValMark Securities Inc. All Rights Reserved.
  • “Despite high levels of concern over retirement, new actuarial study sees little change among Americans in planning for the future.” 2009 Risks & Process of Retirement Survey Report of Findings Sponsored by the Society of Actuaries (March, 2010)Copyright © 2011 ValMark Securities Inc. All Rights Reserved.
  • Are you going to offer to help build them a Retirement Income Survival Kit (R.I.S.K.)™? email: risk@valmarksecurities.comCopyright © 2011 ValMark Securities Inc. All Rights Reserved.