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- 1. Retirement Income
- 2. Then and Now Asset allocation before and after retirement <ul><li>© 2010 Morningstar. All Rights Reserved. 3/1/2010 </li></ul><ul><li>Before retirement </li></ul><ul><li>Accumulation </li></ul><ul><li>Long-term growth </li></ul><ul><li>Current savings </li></ul><ul><li>Time to recover </li></ul><ul><li>Tax-deferred growth </li></ul><ul><li>After retirement </li></ul><ul><li>Disbursement </li></ul><ul><li>Long-term growth </li></ul><ul><li>Current income </li></ul><ul><li>Downturns immediately felt </li></ul><ul><li>Minimum required distributions </li></ul><ul><li>Taxes </li></ul>
- 3. Retirees Face Numerous Risks <ul><li>© 2010 Morningstar. All Rights Reserved. 3/1/2010 </li></ul><ul><li>Withdrawals </li></ul><ul><li>What rate is sustainable? </li></ul><ul><li>Sequencing by tax bracket </li></ul><ul><li>Managing RMDs </li></ul>Retirement income <ul><li>Retiree spending </li></ul><ul><li>Replacement ratio </li></ul><ul><li>Essential versus lifestyle </li></ul><ul><li>expenses </li></ul><ul><li>Medical expenses </li></ul><ul><li>Market volatility </li></ul><ul><li>Uncertain returns and </li></ul><ul><li>income </li></ul><ul><li>Impact of point in time </li></ul><ul><li>Asset allocation and location </li></ul><ul><li>Longevity </li></ul><ul><li>Long retirement horizons— </li></ul><ul><li>a couple aged 65 has 25% </li></ul><ul><li>chance of a survivor living </li></ul><ul><li>to age 96 </li></ul><ul><li>Solvency </li></ul><ul><li>Pension plans and retiree </li></ul><ul><li>benefits—a thing of the past </li></ul><ul><li>Social Security and Medicare </li></ul><ul><li>Savings </li></ul><ul><li>Under-funded defined </li></ul><ul><li>contribution accounts </li></ul><ul><li>Most Americans have an </li></ul><ul><li>enormous savings gap </li></ul><ul><li>Inflation </li></ul><ul><li>Erodes the value of savings </li></ul><ul><li>and reduces returns </li></ul><ul><li>Health care inflation 5% </li></ul>
- 4. Retirees Should Plan for a Long Retirement Probability of a 65-year-old living to various ages <ul><li>Source: Annuity 2000 Mortality Tables. © 2010 Morningstar. All Rights Reserved. 3/1/2010 </li></ul>0 25 50 75 100% 65 years old 70 75 80 85 90 95 100 105 • Male • Female • At least one spouse 78 86 85 91 91 96 81 88 93
- 5. Retirees Need to Replace a Significant Amount of Income in Retirement Average replacement ratios at various pre-retirement income levels <ul><li>Data is from Aon Consulting’s 2008 Replacement Ratio Study: A Measurement Tool for Retirement Planning. © 2010 Morningstar. All Rights Reserved. 3/1/2010 </li></ul>94% 90% 85% 81% 78% 77% 77% 78% 84% 86% 88% 65 70 75 80 85 90 95% Replacement ratio $20k 30 40 50 60 70 80 90 150 200 250 Pre-retirement income
- 6. Personal Savings Expected to Play a Larger Role in Retirement Survey of retirement income sources <ul><li>Source: Employee Benefit Research Institute, 2009 Retirement Confidence Survey. © 2010 Morningstar. All Rights Reserved. 3/1/2010 </li></ul>0 20 60 100% 40 80 81% 92% 75% 40% 70% 47% 63% 41% 59% 58% Social Security Employer-sponsored retirement savings plan (ex. 401k) Other personal savings/investments Individual Retirement Account (IRA) Employer-provided traditional pension plan • Workers (Expected) • Retirees (Reported)
- 7. Social Security is Under Strain Number of beneficiaries per 100 covered workers <ul><li>Low-cost—assumes relatively rapid economic growth, low inflation, and favorable (from the standpoint of program financing) demographic and program-specific conditions; Intermediate—represents the Trustees’ best estimates of likely future demographic, economic, and program-specific conditions; High-cost—assumes relatively slow economic growth, high inflation, and unfavorable demographic and program-specific conditions. © 2010 Morningstar. All Rights Reserved. 3/1/2010 </li></ul>2050 1960 1970 1980 1990 2000 2010 2020 2030 2040 Historical Estimated 60 40 30 20 0 10 50 • Low cost • Intermediate • High cost
- 8. Inflation Significantly Erodes Purchasing Power Over Time Effects of 3% inflation on purchasing power <ul><li>Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. © 2010 Morningstar. All Rights Reserved. 3/1/2010 </li></ul>$100k 80 60 40 20 0 0 Years 5 10 15 20 25 30 $73,742 $63,325 $54,379 $46,697 $40,101 $85,873
- 9. Inflation and Taxes Reduce Returns Compound annual returns,1926–2009 <ul><li>Past performance is no guarantee of future results. Assumes reinvestment of income and no transaction costs. Inflation rate over the time period 1926–2009 was 3.0%. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2010 Morningstar. All Rights Reserved. 3/1/2010 </li></ul>Cash Bonds Stocks – 2 0 2 4 6 8 10% Return After inflation After taxes & inflation Return After inflation After taxes & inflation Return After inflation After taxes & inflation 9.8% 6.6% 4.6% 5.4% 2.3% 0.3% 3.7% 0.6% – 0.7%
- 10. Sustainable Withdrawal Rates Vary Over Time Rolling 30-year periods 1926–2009 <ul><li>Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2010 Morningstar. All Rights Reserved. 3/1/2010 </li></ul>2 4 6 8 10 12% • 75% stocks/25% bonds • 50% stocks/50% bonds • 25% stocks/75% bonds Jan 1926 Dec 1955 1976 2005 1931 1960 1936 1965 1941 1970 1946 1975 1951 1980 1956 1985 1961 1990 1966 1995 1971 2000
- 11. Withdrawal Rate You Can Sustain May Be Lower Than You Think Average: 1926–2009 <ul><li>Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2010 Morningstar. All Rights Reserved. 3/1/2010 </li></ul>6.05% 5.20% 4.33% 0 1 2 3 4 5 6% 75% Stocks/25% Bonds 50% Stocks/50% Bonds 25% Stocks/75% Bonds
- 12. The Sequence of Returns Can Significantly Affect Your Retirement Sequence of returns matters <ul><li>Past performance is no guarantee of future results. Hypothetical value of $500,000 invested at the beginning of 1973 and August 1994. Assumes inflation-adjusted withdrawal rate of 5%. Portfolio: 50% large-company stocks/50% intermediate-term bonds. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2010 Morningstar. All Rights Reserved. 3/1/2010 </li></ul>$500k 400 300 200 100 0 1973 1977 1981 1985 1989 1993 1993 1989 Aug 94 1985 1981 1977 1973 0.5 1.0 1.5 2.0 $2.5 mil Actual historical return sequence Reversed historical return sequence
- 13. Discussion of Simulation Criteria and Methodology <ul><li>© 2010 Morningstar. All Rights Reserved. 3/1/2010 </li></ul><ul><li>Many of the following images were created using Monte Carlo parametric simulation. This model estimates the range of possible outcomes based on a set of assumptions including arithmetic mean (return), standard deviation (risk), and correlation for a set of asset classes. The inputs used herein are the historical 1926–2009 figures. The risk and return of each asset class, cross-correlation, and annual average inflation over this time period follow. Stocks: risk 20.5%, return 11.8%; Bonds: risk 5.7%, return 5.5%; Correlation – 0.01; Inflation: return 3.1%. </li></ul><ul><li>Note that other investments not considered may have characteristics similar or superior to those being analyzed. Each simulation produces 35 randomly selected return estimates consistent with the characteristics of the portfolio to estimate the return distribution over a 35-year period. Each simulation is run 5,000 times, to give 5,000 possible 35-year scenarios. A limitation of the simulation model is that it assumes the distribution of returns is normal. Should actual returns not follow this pattern, results may vary. </li></ul>
- 14. Interpreting Confidence Levels in Simulation <ul><li>This table is intended to help interpret 50%, 75%, and 90% confidence levels illustrated in the following images. © 2010 Morningstar. All Rights Reserved. 3/1/2010 </li></ul>50% 75% 90% (More conservative) 50% 75% 90% 25% 10% 50% Confidence level Chance of exceeding Chance of falling short
- 15. Simulation Can Illustrate the Probability of Achieving Outcomes A visual interpretation of confidence levels in simulation <ul><li>IMPORTANT: Projections generated by Morningstar regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Results may vary over time and with each simulation. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2010 Morningstar. 3/1/2010 </li></ul>$10 mil 1 mil 100k 10k 65 Years old 70 75 80 85 90 95 100 • 50% confidence level • 75% confidence level • 90% confidence level
- 16. High Withdrawal Rates Will Quickly Deplete Your Assets Simulated portfolio values (90% confidence level) <ul><li>IMPORTANT: Projections generated by Morningstar regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Results may vary over time and with each simulation. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2010 Morningstar. 3/1/2010 </li></ul>Withdrawal rate: 8% 7% 6% 5% 4% $1 mil 500k 100 50 10 65 years old 100 95 90 85 80 75 70
- 17. Market Performance Affects Chance of Portfolio Shortfall Six percent inflation-adjusted withdrawal at three confidence levels <ul><li>IMPORTANT: Projections generated by Morningstar regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Results may vary over time and with each simulation. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2010 Morningstar. 3/1/2010 </li></ul>$1 mil 500k 100 50 10 65 years old 100 95 90 85 80 75 70 • 50% confidence level • 75% confidence level • 90% confidence level
- 18. High Withdrawal Rates Will Quickly Deplete Your Assets Age to which a portfolio may last based on withdrawal rate (90% confidence level) <ul><li>IMPORTANT: Projections generated by Morningstar regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Results may vary over time and with each simulation. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2010 Morningstar. 3/1/2010 </li></ul>74 75 77 79 82 86 94 100+ • Portfolio: Stocks 50% Bonds 40 Cash 10 10% Withdr. rate 9 8 7 6 5 4 3 Age 65 70 75 80 85 90 95 100
- 19. Probability of Meeting Income Needs Various withdrawal rates and portfolio allocations over a 25 - year retirement <ul><li>IMPORTANT: Projections generated by Morningstar regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Results may vary over time and with each simulation. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2010 Morningstar. All Rights Reserved. 3/1/2010 </li></ul>85% 34% 4% 0% 0% 97% 72% 28% 5% 0% 96% 81% 54% 28% 12% 93% 80% 62% 44% 28% 90% 78% 64% 50% 38% 4% Withdrawal rate 5% 6% 7% 8% 100% Bonds 75% B 25% S 50% B 50% S 25% B 75% S 100% Stocks
- 20. Providing for Retirement Income <ul><li>© 2010 Morningstar. All Rights Reserved. 3/1/2010 </li></ul><ul><li>Retirement risks can be managed by intelligent combination of funds, stocks and bonds, and insurance products </li></ul><ul><li>How do you find the right asset mix for retirement? </li></ul><ul><ul><li>age and risk tolerance </li></ul></ul><ul><ul><li>desire for consumption and bequest </li></ul></ul><ul><ul><li>expenses and fees of product choices </li></ul></ul>

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