Good morning everyone. What I would like to do first is provide you with an overview of what I would like to accomplish in today’s seminar and insurance sales presentation – Challenges that may impact your retirement.
What has changed for you? First, with the diminishing defined benefit plans, you must take more personal responsibility for your retirement which has led the increasing popularity of the 401(k). But is that enough? The average account balance for 401(k) participants, as of 2006, is approximately $121,202. If you consider the annual income this account will produce using what’s deemed a reasonable withdrawal rate, it may not be enough. Most of you will need significantly more income to maintain your current standard of living.
One option that is becoming more and more necessary for retirees is continuing to work during their retirement years. In fact, 24% of retirees work in retirement - 86% of pre-retirees have not ruled out working. Reasons retirees have given for working during retirement - 27% need extra income - 14% cannot afford to retire.
Another aspect of retirement that has changed for you revolves around debt, specifically mortgages. The Wall Street Journal reported in September of 2007 that 19% of retirees ages 65-74 carried a mortgage into retirement in 1992. In 2004 that number was up to 32%.
Arguably the biggest topic for you is the future of social security – will it be there for you? A report from the social security board of trustees in March 2008 projected that social security: By 2017 – the tax revenues will fall below program costs which means social security will be working in a deficit. And by 2041, the trust funds will be totally exhausted.
As the graph illustrates, the sources of retirement income are changing. Individuals who retired in 1974 could rely on Social Security and private pension plans for the majority of their income needs. Consider the individuals entering retirement in 2030, however. While income from pension plans and Social Security will contribute a small amount toward the income of tomorrow’s retirees, best estimates indicate that these individuals should plan to rely much more on income from their personal savings and employment.
Here is a very simple way to illustrate just how much money you might need to retire. Take your desired annual retirement income amount and identify the income gap. At this point the number doesn’t look too bad. Now divide by the desired withdrawal rate, in this case, 4%. The result is usually a much, much larger number than expected. This exercise may be helpful in illustrating the importance of saving for retirement.
You are now faced with more challenges than previous generations. Being able to identify, understand and address these challenges may go a long way in achieving your retirement goals. There are 5 key financial challenges you may face during retirement. They are: Longevity, Inflation, Health Care Costs, Asset Allocation and Excess Withdrawal. Asset allocation does not ensure a profit and does not protect against loss in a declining market.
If a retirement savings plan is designed to meet average life expectancy, almost half will outlive savings because they will live too long. A better way to look at life expectancy with regards to retirement is to look at the probability someone at age 65 (or their expected retirement age) will live. The following chart illustrates the probably that one person in a couple - age 65 will need retirement income for 15, 20, 25 and 30 years or from ages 80 to 95. There is over a 9 out of 10 chance that either you or your spouse will spend 15 years in retirement (age 80) – 2 years beyond the average life expectancy in 2007. There is over a 8 out of 10 chance that you will spend 20 years in retirement (age 85), over a 60% chance of spending 25 years in retirement (age 90) and over a 1 in 3 chance of spending 30 years in retirement (age 95). Underestimating the amount of time you could spend in retirement exposes you to the risk of outliving your savings.
The next challenge is inflation. This is a good one for any of you who are tempted to just stick your money under the mattress. That might seem like a good idea for the short-term, but it’s extremely risky over time, because of inflation risk—the risk that your investments won’t keep pace with inflation, causing your purchasing power to decline. Just take a look at the price of a stamp in 1981, 20 cents versus 2008 -- 42 cents. And, inflation does not stop when you retire. This means your income will need to increase during retirement to maintain your standard of living.
In recent years, the cost of health care has risen dramatically, sometimes exceeding the rate of inflation. This may become especially important during the later years of retirement. The average annual price increase from 2000-2005 for prescription drugs is 10.7% and 7.9% for physician & clinical services. During the same time period the inflation rate has been (click) 2.5%.
Too aggressive or too conservative? The chart illustrates two different investments compared to the consumer price index (inflation). While one investment – T-Bills provides very little volatility, it just barely keeps pace with inflation. The other investment – S&P 500 – outpaces inflation, however if you are nearing retirement you may not be able to handle the volatility inherent in variable investments. Too often people choose one or the other leaving themselves invested either too aggressively or too conservatively.
Now let’s talk about two important points when it comes to equity investing – investor confidence and emotional risk. 1. Investor Confidence – the confidence investors have to remain invested for the long-term through good markets and bad. 2. Emotional Risk – is the risk that an investor makes an irrational investment decision based on current market swings. Why are these two points so important? You only have to look at this chart to understand the answer. The yellow bar represents real investor average returns in equity mutual funds from 1988 – 2007. The green bar represents the average annual return of the S&P 500 index for the same 20-year period. The S&P 500 Index is a list of securities frequently used as a measure of U.S. stock market performance. As you can see, this unmanaged index significantly outperformed the average investor. Furthermore, investors barely edged out inflation. The general explanation for this phenomenon is that investors do not have the discipline or the confidence to remain invested for the long-term. Therefore, it is important for an investor to have the confidence to remain invested during periods of short-term volatility and stay the course as it may help you meet your long-term investment objectives.
One way to do that is diversification through asset allocation. Consider the risk and return potential of different investments. Take a look at this chart… Look at the returns for Small Cap Growth from 1997 to 2007 (click) . In 1999 it was the best performing asset class (in this study) at 43.09% and the very next year it was the worst performing class at -22.43%. Once again in 2002. This time at -30.26%, just to come back the next year and be a top performer at 48.54%. As you can see the red line illustrates the volatility of Small Cap Growth funds. Obviously, you must be prepared to be able to weather that sort of turbulence, both financially and mentally. If your portfolio is over concentrated then you are at a higher risk if a bear market strikes. Now let’s look at the diversified portfolio (click) . As you can see by the more smooth green line, investing funds for retirement income in several different assets classes, your portfolio may experience less overall volatility and steadier returns over time, while still providing the opportunity to outpace inflation.
The importance of selecting a realistic withdrawal rate cannot be overestimated. If capital is lacking, people logically may desire to increase the withdrawal rate. In turn, a high withdrawal rate raises the chances of portfolio failure. In order to compensate a higher withdrawal rate, retirees will need a higher investment return, which increases volatility within the portfolio and again, increases the likelihood of portfolio failure. The ultimate plan possesses a withdrawal rate that provides adequate funds and maximizes the chance for success. The chart shows how the amount of withdrawal and various portfolio allocations can affect the probability of meeting income needs over a 25-year retirement. It assumes a retiree withdraws an inflation-adjusted percentage of their initial savings amount each year, beginning in their first year of retirement. As you can see, the higher the withdrawal rate, the more likely they are of running out of money which puts 8%, 7% and even 6% as unlikely withdrawal amounts. If a retiree has a portfolio of 100% bonds the chances of sustaining a withdrawal for 25 years is not very likely if it is anything above 4%. The probability of a portfolio running out over retirement is less likely as the amount withdrawn decreases and equities are added (go through chart to illustrate). The probability percentage can be translated into a “confidence” percentage. Do you want a withdrawal rate that gives you 41% confidence as seen in the 8%/100% Stocks cell or 97% confidence as shown in the 4%/75%-25% Bonds Stock cell?
Consult a financial representative! Now, I realize many of you may have already established a relationship with a financial representative, but for those of you who haven’t, it’s a very good idea. In the last few years, there’s been a lot of talk about investing on your own using the internet to create your own plan. Granted, it’s fast, it’s easy and there’s a lot of great information on a lot of those sites. But you have to know what to do with that information…how to interpret it…how to use it for your benefit…your goals. And that’s the sort of personalized wisdom no Web site can provide. Without it, you—and your savings— can really get hurt. Financial representatives will sit down with you and help you: Establish realistic goals Address the challenges Develop a strategy and Monitor and update the strategy over time It’s in their best interest to make sure you reach your goals, whatever they are.
Now it is time to take the next steps: Step 1 – gather information – estimate your retirement living expenses, future sources of income and financial assets. Step 2 – Formulate a retirement income strategy Step 3 – Put your strategy into action
Challenges that may impact your retirement 1008 RIO1341 1010 Seminar and Insurance Sales Presentation
Today’s objectives <ul><li>1 Retirement – what’s changed? </li></ul><ul><li>2 The challenges you may face </li></ul><ul><li>3 A way to invest, prepare and protect </li></ul>Not FDIC/NCUA Insured Not A Bank Deposit Not Bank Guaranteed May Lose Value Not Insured By Any Federal Government Agency
Retirement – what’s changed? <ul><li>Shift to 401(k) – are savings enough? </li></ul>As of year end 2006. 401(k) Plan Asset Allocation, Account Balances and Loan Activity in 2006 – www.ici.org Deloitte – Annual 401(k) Benchmarking Survey 2005/2006 Edition 20% percentage of employees who have a pension plan $121,202 average 401(k) balance
Retirement – what’s changed? <ul><li>24% of retirees work in retirement </li></ul><ul><li>86% of pre-retirees have not ruled out working </li></ul><ul><li>27% need extra income </li></ul><ul><li>14% cannot afford to retire </li></ul>LIMRA – Working in Retirement – 2007
Retirement – what’s changed? <ul><li>Mortgages in retirement </li></ul><ul><ul><li>Retirees ages 65 - 74 </li></ul></ul><ul><ul><li>19% in 1992 </li></ul></ul><ul><ul><li>32% in 2004 </li></ul></ul>Wall Street Journal Online – September 2007
Retirement – what’s changed? <ul><li>Social Security: will it be there for you? </li></ul><ul><ul><li>Trust fund assets projected to be exhausted 2041 </li></ul></ul>Social Security Board of Trustees – March 2008
Retirement – what’s changed? <ul><li>Personal assets and work </li></ul>Source: Research on Potential New Products for Retirement Income, FCNBD, May 2006 1974 2030 Projected
Will you be prepared? <ul><li>How much money might you need to retire? </li></ul>Desired Annual Retirement Income Pension Income Example Your information $100,000 – $24,000 ? ? Social Security Income Gap Desired Withdrawal Rate Personal Savings Needed – $25,000 $51,000 .04 (4%) $1,275,000 ? ? ? ? :
Challenges of retirement <ul><li>Longevity </li></ul><ul><li>Inflation </li></ul><ul><li>Health care costs </li></ul><ul><li>Asset allocation </li></ul><ul><li>Excess withdrawal </li></ul>
Longevity risk <ul><li>People are living longer </li></ul><ul><ul><li>Probability of a 65-year-old couple needing income for: </li></ul></ul>Annuity 2000 Mortality Table, Society of Actuaries
<ul><li>Cost of goods and services are increasing </li></ul>Inflation Source: U.S. Postal Service 2008
<ul><li>Health care costs outpace inflation </li></ul><ul><ul><li>Average annual price increases – </li></ul></ul><ul><ul><li>years 2000-2005 </li></ul></ul>Health care costs Prescription drugs: Physician & clinical services: 10.7% 7.9% Inflation: 2.5% National Center for Health Statistics – Health, United States 2007
Risk: too aggressive or too conservative? Long term return potential. Significant potential. Volatility. Lower return potential. Little volatility. The indices represented in the grid are unmanaged, do not incur expenses and cannot be purchased directly by investors. The historical performance shown is for illustrative purposes only and does not represent the performance of any particular product or underlying fund. Assumptions: $100,000 investment 1988-2007. Past performance does not guarantee future results. The investment return and principal value of a security will fluctuate with market conditions so that when redeemed, may be worth more or less than their original cost . The S&P 500 Index is a list of securities frequently used as a measure of U.S. stock market performance. The Consumer Price Index (CPI) is an inflationary indicator that measures the change in the cost of goods purchased by the average U.S. household. Treasury Bills (TBills) are a short-term obligation of the U.S. Treasury having a maturity period of one year or less and sold at a discount from face value.
Equity investing <ul><li>Average annual return 1988 – 2007 </li></ul>4.5% Average Investor 11.8% S&P 500 Index 3.0% Inflation Source: Dalbar, Inc., QAIB Study, 2008. This hypothetical example is for illustrative purposes, and is not representative of any MassMutual product. The S&P 500 Index is a list of securities frequently used as a measure of U.S. stock market performance. Indices are not available for direct investment.
Diversification through asset allocation The indices represented in the grid are unmanaged, do not incur expenses and cannot be purchased directly by investors. The historical performance shown is for illustrative purposes only and does not represent the performance of any particular product or underlying fund. Source: S&P Micropal, February 2008 Past performance does not guarantee future results. The investment return and principal value of a security will fluctuate with market conditions so that when redeemed, may be worth more or less than their original cost. Asset allocation does not ensure a profit and does not protect against loss in a declining market.
Diversification through asset allocation The indices represented in the grid are unmanaged, do not incur expenses and cannot be purchased directly by investors. The historical performance shown is for illustrative purposes only and does not represent the performance of any particular product or underlying fund. Past performance does not guarantee future results.
Don’t leave your retirement to chance <ul><li>Consult a financial professional. </li></ul><ul><li>A financial professional will help you: </li></ul><ul><ul><li>Establish Goals </li></ul></ul><ul><ul><li>Address Challenges </li></ul></ul><ul><ul><li>Develop a Strategy </li></ul></ul><ul><ul><li>Monitor and Update Strategy </li></ul></ul>
Steps to develop a retirement income strategy Planning your retirement income strategy: Gather information Formulate a strategy Put strategy into action 1 2 3
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.
<ul><li>The information provided is not written or intended as 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. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. </li></ul><ul><li>Annuity products are issued by Massachusetts Mutual Life Insurance Company and C.M. Life Insurance Company. C.M. Life Insurance Company, 100 Bright Meadow Boulevard, Enfield, CT 06082, is non-admitted in New York and is a subsidiary of Massachusetts Mutual Life Insurance Company, 1295 State Street, Springfield, MA 01111-0001. </li></ul><ul><li>Principal Underwriter: MML Distributors, LLC, 1295 State Street, Springfield, MA 01111-0001. Wholly owned subsidiary of Massachusetts Mutual Life Insurance Company. </li></ul>