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Avoiding Mistakes in Planning for Retirement
- 1. Kathleen Wyble Graham, First Vice- President Wells Fargo Advisors Avoiding big mistakes when saving for retirement
- 2. Proper retirement planning is key Maintain standard of living Generate retirement income to last your lifetime
- 3. Retirement planning Know where you are. Determine where you are going. Follow your plan.
- 4. Mistake #1 – Forgetting about inflation’s effects Inflation’s powerful effects If prices rise 4% annually: $1.00 82¢ 66¢ 44¢ Today Five years from now 10 years from now 20 years from now Source: Consumer Price Index Relative worth
- 5. Mistake #1 – Forgetting about inflation’s effects $ Years from now 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Purchasing power of $50,000 Assuming 4% inflation $ $ $ $ $ $
- 6. Mistake #2 – Not having a proper asset allocation Asset allocation … Is the combination of asset classes in a portfolio and their proportion to one another Requires building a balanced portfolio with appropriate diversification across asset classes May help reduce the effects of market volatility Can help you take advantage of your return potential Asset allocation does not eliminate fluctuating prices or uncertain returns.
- 7. Mistake #2 – Not having a proper asset allocation for your portfolio
- 8. Mistake #2 – Not having a proper asset allocation for your portfolio (cont.) Past performance is no guarantee of future results. You cannot invest directly in an index.
- 9. 9 Mistake #2 – Not having a proper asset allocation for your portfolio (cont.)
- 10. Mistake #3 – Underestimating the effect of taxes The benefits of tax deferral Example is for illustrative purposes only and does not reflect the performance of any specific investment. Wells Fargo Advisors is not a legal or tax advisor. Tax-deferred investment Taxable investment $ $645,100 value after taxes, assuming a 39.6% tax bracket and a lump sum distribution $1,068,047 $561,202 $ $
- 11. Mistake #4 – Underestimating spending during retirement 38% of retirees report their actual expenses in retirement are somewhat or much higher than expected.1 42% of those who experienced higher than expected expenses coped by reducing spending and the quality of life.1 32% of retirees indicate their current debt level is at least a minor problem in retirement.1 1. Source: Employee Benefit Research Institute retirement confidence survey, March 2016.
- 12. Mistake #5 – Having unrealistic investment expectations Market timing — The risk of missing major opportunities Ibbotson Large Company Stock Index annualized returns, 1996-2015 Source: Morningstar. This hypothetical illustration is based on the Ibbotson® Large Company Stock Index with dividends reinvested over the 20-year period of 1996 through 2015. Past performance is no guarantee of future results. An index is not managed and is unavailable for direct investment. Returns and principal invested in stocks are not guaranteed. Holding a portfolio of securities for the long-term does not ensure a profitable outcome, and investing in securities always involves risk of loss.
- 13. Mistake #6 – Underestimating the time you will spend in retirement Americans are living longer Source: RP-2000 Mortality Table Projected to 2013 Life expectancy (years)
- 14. Mistake #7 – Mismanaging tax-deferred assets Tapping into your tax-deferred investments at or before age 59½. Spending from your tax-deferred investments first.
- 15. Mistake #8 – Failing to plan for unexpected health-care expenses Long-term care is the assistance you receive when you cannot care for yourself and require help with the daily living activities. The need for long-term care can result from: Accident Chronic illness Short-term disability Advancing age
- 16. Mistake #8 – Failing to plan for unexpected health-care expenses A growing problem 2015 CareScout Nationwide survey. This illustration assumes a private room and 4% annual increase in costs. Insurance products offered through affiliated nonbank insurance agencies. Projected annual nursing-home costs (private room) 2015 2020 2025 2030 2035
- 17. The big mistakes $ 6. Underestimating time spent in retirement 4. Underestimating spending during retirement 8. Unexpected health-care expenses 1. Forgetting inflation’s effects 3. Underestimating taxes 7. Mismanaging tax- deferred assets 5. Unrealistic investment expectations 2. Improper asset allocation
- 18. Retirement planning You should identify: What you have What you need How to get there
- 19. The Envision® process An Envision investment plan … Can help you work toward your financial goals Uses historical market data and statistical modeling Is flexible
- 20. We want to know your thoughts
- 21. Wells Fargo Advisors is the trade name used by two separate registered broker-dealers: Wells Fargo Advisors, LLC and Wells Fargo Advisors Financial Network, LLC, Members SIPC, non- bank affiliates of Wells Fargo & Company. ©2010-2015 Wells Fargo Advisors, LLC. All rights reserved. 0416-02226 [38760-v15] e6690 Investment and Insurance Products: NOT FDIC Insured NO Bank Guarantee MAY Lose Value
Editor's Notes
- Welcome to the “Avoiding Big Mistakes When Saving for Retirement” seminar, and thank you for coming. My name is [Name], and I am a [Compliance-approved title] with Wells Fargo Advisors. FA note: You may want to include some brief biographical information about yourself at this point. Be sure to use CAR-approved language. Today I want to talk with you about common mistakes people make when saving for retirement and provide some advice to help you avoid them.
- Why is retirement planning so important? First of all, you’ll want to maintain your standard of living in retirement. I’m sure everyone here wants to live as well during their retirement as they do during their working years. You’ll also want to know that you’ll have income that you can depend on during retirement — no matter how long it may be.
- I’m sure many of you have thought about when you want to retire. But have you also thought about where you want to live and which hobbies or activities you want to pursue? Think of retirement planning as a simple three-step process. The first step is to know where you are financially today. The second is to determine where you’re going, and the third is to follow your plan by saving and investing, protecting your earnings power, and avoiding the common potentially costly mistakes that we are about to discuss.
- Now let’s move on to the the first mistake investors often make with their retirement nest eggs. Many investors fail to consider how inflation can impede them from achieving their retirement goals. During the next 20 to 30 years, the cost of living will likely double or even triple. As the graphic shows, if prices rise 4% each year, $1 today will have the purchasing power of just 44 cents 20 years from now. Let me give you another example.
- This chart shows how a 4% inflation rate can shrink the purchasing power of a $50,000 annual income to less than $25,000 in 20 years. If you’re age 65 now, do you want to be living on half of your income when you’re age 85? That’s what could happen if you don’t consider inflation’s effects on your retirement savings.
- Mistake number two is not having a proper asset allocation. Asset allocation is the combination of asset classes — such as stocks, bonds, and cash alternatives — in a portfolio and their proportion to one another. It requires building a balanced portfolio with appropriate diversification across asset classes. Proper asset allocation may help reduce volatility and can help you take advantage of your return potential.
- This chart may be one of the most compelling reasons to believe in asset allocation. It shows how various asset classes have performed from 2001 through 2015. The best-performing asset class is at the top of each column. You can see that the long-term average for REITs is 9.2% You might ask: why not simply invest my entire portfolio in RIETs? Let’s take a look at just the past 5 years, starting in 2011. In 2011, REITs were near the bottom of this table, and actually lost 5.8% in value that year. In 2012, this asset class popped up to the top, returning more than 28%. The following year, REITs fell to the middle of the class, with a 4.4% return. REITS returned to the top of the class in 2014, but made just over 0% in 2015. Most investors do not want this type of volatility with their porfolio. Instead, spreading out your risk among several asset classes may help stabilize your portfolio’s performance. Take a look at the “Balanced 4A group” white box. This box represents the return you would have received each year if you had a certain portion of your portfolio invested in each index illustrated. As you can see, in general, this blend performed in the middle of the pack. All investments carry some level of risk, including the potential loss of principal invested. There is no assurance that such an investment strategy will protect you against market risk. Keep in mind, past performance is no guarantee of future results, and you can’t invest directly in an index. In addition, an equal investment in each asset class may not be the appropriate asset allocation strategy for your needs and risk tolerance. FA note: Use “The Value of Asset Allocation” (order code 0000593073) as a handout.
- When saving for retirement, many people don’t consider the effect taxes can have on their savings — another mistake. With a tax-deferred investment — such as an annuity, IRA, or 401(k) — your money has the opportunity to accumulate tax deferred until you withdraw it. That means you’ll potentially have more money to generate more retirement income for a longer time period. Withdrawals made prior to age 59½, however, may be subject to federal income taxes and a 10% IRS penalty. This chart shows just how much more you may be able to save in a tax-deferred investment versus a taxable investment. It illustrates a hypothetical 7% rate of return on a $5,000 annual investment. If you were in the 33% tax bracket, you can see that after 40 years, you would practically double your account’s value versus what you would have if the earnings were taxed each year. Your investment would be worth more than $1 million, instead of about $561,000 for a taxable investment. On your tax-deferred investment, if you withdrew the money all at once at the end of the period and paid taxes at the 39.6% rate — today’s highest — you would still end up with approximately $645,100 — that’s approximately $84,000 more than the taxable account’s value. These figures are for illustrative purposes only and do not reflect the actual performance of any specific investments. Fees and charges are not reflected in the illustration and would reduce the performance shown if they were.
- Most people miscalculate how much money they will spend during retirement, which brings us to mistake number four. They think that because they won’t have the expense of traveling to and from work every day, they will spend less. But they fail to consider the leisure-related activities they will want to enjoy during retirement — such as dining out and vacations. That costs money. In fact, many new retirees spend as much or more in retirement as they did before. Will you have enough money to meet your needs?
- Mistake number five: Some investors have unrealistic expectations about their investments. They believe when the market is down, they should sit on the sidelines until it rallies. If the market is up, they wait for a correction to buy at bargain rates. Because market timing is very difficult, even for seasoned investors, these tactics seldom work. When building assets for retirement, you need to stay focused on your long-term goals. Savvy investors stay in the market. This chart reflects returns for the Ibbotson® Large Company Stock Index during a 20-year period and shows that if you had stayed invested in the market the whole time, you would have averaged 8.2% annual return over all the market’s trading days. What happened if you missed the market’s 10 best days? You can see that your return would have averaged only 4.5% annually. And if you missed 40 or more of the market’s best days, you would have had a negative return. It’s not market timing, but time in the market that can bring about long-term success. It’s important to base your long-term investment planning around realistic return expectations. Keep in mind that there will be up and down years. Successful investors, however, develop the discipline and patience to shrug off market fluctuations.
- Mistake number six: Many people underestimate the time they will spend in retirement. Life expectancies continue to rise in the United States. Quality medical care and a growing health consciousness have caused many Americans to live well into their 90s. As you can see, 65-year-old Americans can expect to live approximately 20 more years. That means quite a bit of time spent in retirement. In fact, the time you spend in retirement may equal or even exceed your working years. That’s why it’s so important to consider your life expectancy when planning for a retirement that may last 20 to 30 years.
- We spoke earlier of tax-deferred investments, and that’s where investors make another common mistake. They mismanage or neglect their tax-deferred assets. It may not be a good idea to withdraw from your annuities and IRAs — or any other tax-deferred investments — as soon as you reach age 59½. Because you could live a long time in retirement, you want your savings to sustain you during your possible 20- to 30-year retirement. Consider spending from your taxable investments first to give your tax-deferred investments more opportunity to accumulate. You may also want to consider the benefits of a Roth IRA. Distributions from a Roth IRA may provide tax-free income.
- The final common mistake investors make in saving for their retirement is failing to plan for unexpected health care expenses. Long-term care is a risk to retirement savings that most people neglect to consider. The need for long-term care can result from an accident, chronic illness, short-term disability, or advancing age. It’s the help you receive when you are unable to care for yourself and require assistance with everyday activities.
- Some people think long-term care is not an expense they will incur. But the fact is, more than half of all women and one-third of men who live to the age of 65 will likely spend some time in a nursing home. This chart shows that the average annual cost of a nursing home stay in a private room is more than $91,000. However, that expense could climb to more than $207,000 in 20 years, assuming a 4% annual increase in costs. Through our affiliated nonbank insurance agencies, Wells Fargo Advisors offers a variety of insurance products, including long-term care insurance. I can help you plan for any potential long-term care expenses and help preserve your hard-earned retirement assets for you and your family.
- To recap, the big investor mistakes in saving for retirement are: Forgetting about inflation’s effects Not having a proper asset allocation for your portfolio Underestimating taxes Underestimating your spending during retirement Having unrealistic investment expectations Underestimating the time you will spend in retirement Mismanaging tax-deferred assets Failing to plan for unexpected health-care expenses If you have made any of these investment mistakes, you are not alone. But you don’t have to let these common mistakes keep you from planning for your retirement. I can help you work toward your retirement goals.
- Sound retirement planning is key. Remember, retirement planning boils down to identifying what you have, what you need and how to get there.
- Having an Envision investment plan, which I can create with your help, is a great way to avoid making mistakes with your retirement savings. Unlike other retirement planning tools, the Envision process uses historical market data and sophisticated statistical modeling to develop a plan to help you work toward your unique financial goals. One of the great things about the Envision process is its flexibility. Let’s say we meet and create your plan on the assumption that you’ll retire at age 65 and a year from now you decide you’d rather retire at age 60. I can make that change and let you know immediately what, if any, adjustments you’ll need to make to your plan to make early retirement possible. The same is true for any change in your life, such as the birth of a child or a grandchild whom you’d like to help send to college. For more information, please take a few minutes to read the Envision brochure I brought with me today. FA note: Have copies of the “Defining Tomorrow, Today” brochure (order no. 0000583704) available for attendees.
- At Wells Fargo Advisors, we never forget that it’s your money, not ours, and that we’re here to serve you and help you achieve your objectives. The most important part of attending today’s seminar is included on this “Seminar Evaluation Form.” Please pay special attention to the last section of the form, which asks for appointment information. This is where we can turn what we’ve talked about today into action. FA note: Hand out copies of the “Seminar Evaluation Form” (e6671 on InfoMax) and ask attendees to complete and return them before leaving the presentation.