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Building better retirement_portfolios_client


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Building better retirement_portfolios_client

  1. 1. 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.
  2. 2. Agenda• Retirement Risks & Challenges• Traditional Approaches• Total Return Portfolio Strategy• Managing Cash Flow and Emotions
  3. 3. 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
  4. 4. Longevity Risk: Plan for a Long Retirement 100% 78 81 86 75 • Male 85 88 91 50 • Female • At least one spouse 91 93 96 25 0 65 years old 70 75 80 85 90 95 100 105Source: Annuity 2000 Mortality Tables. © 2010 Morningstar, Inc.All rights reserved. 3/1/2011
  5. 5. 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
  6. 6. Finding Risk: More Personal Savings Responsibility Next Generation Retirees Today’s Retirees (Expected sources of (Actual sources of retirement income) income in 2006) 20% 36% 43% 14% 66% • Social Security 20% • Pension plans • Personal savings/otherSource: Employee Benefit Research Institute, 2006 Retirement Confidence Survey. Datapresented in 2006 Retirement Confidence Survey may not total 100 due to rounding and/ormissing categories. © 2007 Morningstar, Inc. All rights reserved. 3/1/2007
  7. 7. Inflation Risk: Will Returns Keep Pace with Inflation? Annualized Returns 1926 to 201012% 10 9.9% 8 6 6.6% 5.5% 4 3.7% 2 2.4% 0 0.6% Stocks Bonds Cash Before inflation After inflation Before inflation After inflation Before inflation After inflation Past performance is no guarantee of future results. Assumes reinvestment of income and no transaction costs or taxes. This is for illustrative purposes only and not indicative of any investment. Stocks are represented by the Standard & Poor’s (S&P) 500 Index; Bonds are represented by the Ibbotson/SBBI Long-Term Government Bonds Index; Cash represented by one-month Treasury Bills. An investment cannot be made directly in an index. © 2010 Morningstar, Inc. All rights reserved. 3/1/2011
  8. 8. Traditional Approach: Impact of 4% Annual Inflation on an Income Portfolio$100k $85,873 80 $73,742 $63,325 $54,379 60 $46,697 40 • Purchasing power of today’s income and principal $40,101 will decline over time 20 • Fixed income is generally not good hedge against inflation because values tend to decline in periods of unexpected inflation, along with investors’ spending power 0 0 Years 5 10 15 20 25 30 This is for illustrative purposes only and not indicative of any investment. Assumes an inflation rate of 4.0%. © 2007 Morningstar, Inc. All rights reserved. 3/1/2007. Past performance is not indicative of future results.
  9. 9. 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.
  10. 10. 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.
  11. 11. 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
  12. 12. 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
  13. 13. 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.
  14. 14. Advantages of the Distribution Portfolio SeriesDesigned to Provide:• Addresses potential short-term emotional responses• Better management of inflation risk• Improved sustainability of withdrawals
  15. 15. 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.