Target Retirement Income Planning


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A Target Retirement Income Plan is a nonqualified, supplemental, after-tax executive retirement benefit program that changes the focus from return on investment to certainty of predictable income in retirement.

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Target Retirement Income Planning

  1. 1. An Introduction to: Target Retirement Income Plans A Nonqualified Executive Retirement Program The Outcome is Income SM Securities offered through Ameritas Investment Corp. (AIC) Member FINRA/SIPC AIC is not affiliated with Price, Raffel & Browne
  2. 2. The Following Program Is Rated: <ul><li>R </li></ul>REALLY IMPORTANT
  3. 3. I’m Your Host… <ul><li>Martin Andelman </li></ul><ul><li>Co-Chair, Executive Compensation Practice Group </li></ul><ul><li>Price, Raffel & Browne/PRB Financial </li></ul>
  4. 4. 2008 DATA CLEARLY SHOWS Today’s economic indicators are unlikely to adequately report the various inconsistencies that may very well be prevalent in times of inconsistent inconsistencies, regardless of how other intervening factors may or may not be indicated, insomuch as one can forecast equilibrium under the unprecedented economic conditions that may continue to develop with the constraints of our global financial markets and ongoing dependence of foreign oil and domestic derivatives that have engaged our sensibilities to such an extent that it may not be possible to stop the flood of data that will continue to be misreported. Today’s economic indicators are unlikely to adequately report the various inconsistencies that may very well be prevalent in times of inconsistent inconsistencies, regardless of how other.
  5. 5. FACTS OF THE MATTER <ul><li>FACT: The first of the 78 million baby-boomers turned 60 in 2006, the youngest is now 46, and MOST are NOW within 15 years of reaching retirement age. </li></ul><ul><li> FACT: The optimal practices for managing money CHANGE as we approach retirement age, because of the realities associated with withdrawing income from a portfolio over an extended period of time. </li></ul>
  6. 6. By the way… in case you hadn’t noticed: <ul><li>We Suck at “Change”. </li></ul>
  7. 7. FACTS OF THE MATTER <ul><li> FACT: Most people need to accumulate 50% of their portfolio’s future value during their last 10 years at work. Most money invested - most at risk. </li></ul><ul><li>FACT: We cannot depend on our markets to produce the consistent returns we need over time horizons of 10, 15, or even 20 years. </li></ul>
  8. 8. And, in case you hadn’t noticed: <ul><li>We suck at investing, too. </li></ul>
  9. 9. THE LAST DECADE… <ul><li>The stock market has earned American investors NOTHING or LESS over the last decade. </li></ul><ul><li>Low interest rates have made bonds and bank deposits generally unrewarding as well. </li></ul><ul><li>Absent the tax relief, contributors to defined contribution retirement savings plans would have been better off putting money in mattresses. </li></ul><ul><li>Source: The Economist, December 6-12, 2008. </li></ul>
  10. 10. STUFFED VALUE OF $100 INVESTED MONTHLY OVER 10 YEARS TO NOVEMBER 30, 2008 Source: Morningstar
  11. 11. The Conventional Wisdom: <ul><li>Invest in “quality” equity funds. </li></ul><ul><li>Diversify based on age & risk tolerance. </li></ul><ul><li>Hang in there for the long term. </li></ul><ul><li>Refer to historical averages when nervous. </li></ul><ul><li>Rinse & repeat. </li></ul><ul><li>Everything will work out fine. </li></ul>
  12. 12. What About Our Current Economic Crisis? <ul><li>“ It’s just another market correction. Don’t panic.” </li></ul><ul><li>“ Stay invested in equities. Just diversify properly.” </li></ul><ul><li>“ Historically, our markets rally out of such downturns.” </li></ul><ul><li>“ You don’t want to sell at a loss.” </li></ul><ul><li>“ Or miss the bounce.” </li></ul><ul><li>“ Many predict a recovery in the second half of 2009.” </li></ul><ul><li>Really? Because it seems like </li></ul><ul><li>it could be quite a bit more than that. </li></ul>
  13. 13. So, Which Is It? <ul><li>Just another recession & necessary correction from which our economy & markets will soon recover… just like they “always” have. </li></ul><ul><li>The worst financial and economic crisis since the Great Depression of the 1930s. </li></ul>
  14. 14. About Diversification… <ul><li>Diversification means asset class, so protects against risks to asset accumulation. It DOES NOT address risks to income… higher taxes & market corrections. </li></ul><ul><li>Essentially ALL qualified & nonqualified plans produce distributions taxable as ordinary income. </li></ul><ul><li>Far too large a percentage of retirement assets are exposed to stock market risk. </li></ul><ul><li>Can’t really diversify within a 401(k) plan. For the most part, all plan assets correlate. </li></ul>
  15. 15. AN INCONVENIENT TRUTH… <ul><li>Baby boomers are essentially the first generation that will attempt to prepare for (and live through) retirement based largely on market performance. </li></ul>
  16. 16. The BIG Question (That No One Can Ever Answer) <ul><li>How much money will I receive each month once I stop receiving a paycheck from work, and how long will that income last? </li></ul>
  17. 17. Vanguard’s John C. Bogle On Investing in Mutual Funds <ul><li>Average Annual Returns, 1980-2005 </li></ul><ul><li>S&P 500 = 12.3% </li></ul><ul><li>Mutual Funds = 10% </li></ul><ul><li>Individual Investor = 7.3% </li></ul><ul><li>Individual Investor = 7.3% </li></ul>
  18. 18. WHY? <ul><li>Because “we” buy “high” and sell “low. </li></ul><ul><li>We poured into equities during 1999 & 2000 at top of market… and got out en masse “last week”. </li></ul><ul><li>We’re more like Hometown Buffet than we are Warren Buffet. </li></ul>
  19. 19. Warren Buffet From his 2007-08 Letter to Berkshire Hathaway Shareholders <ul><li>Over the last century the Dow went from 66 to 11,497. </li></ul><ul><li>While this may seem like enormous growth on the surface, compounded annually, it’s just 5.3% per year. </li></ul><ul><li>In this century, if investors matched that return, the Dow would close at 2,000,000 by year end 2099. </li></ul>
  20. 20. Warren Buffet, Cont. <ul><li>“ And anyone who expects to earn 10% annually from equities during this century is implicitly forecasting the Dow to reach 24,000,000 by the year 2100.” </li></ul>
  21. 21. Warren Buffet, Cont. <ul><li>“ If your advisor talks to you about such double digit returns from equities going forward, explain this math to him… not that it will faze him. Many helpers are apparently direct descendants of the queen in Alice in Wonderland who said: </li></ul><ul><li>Why, sometimes I’ve believed as many as six </li></ul><ul><li>impossible things before breakfast.” </li></ul>
  22. 22. From Accumulation to Income: A Night & Day Difference <ul><li>While working, income is produced by the work we do. </li></ul><ul><li>Once retired, however, it’s the earnings on our invested “nest eggs” that need to generate our income. </li></ul><ul><li>Withdrawing funds from an invested portfolio in order to provide predictable income is something few baby boomers understand… yet. </li></ul><ul><li>Hewitt & Associates: “After accounting for inflation and increases in medical costs, the average post-retirement income replacement need is 126% of final pay.” </li></ul>
  23. 23. Depending on the Stock Market? <ul><li>Investors don’t earn their returns smoothly & steadily over time. Evidence shows a few outliers have a massive impact on long-term performance. </li></ul><ul><li>How likely are investors to successfully predict the best days to be in or out of the market? </li></ul>
  24. 24. On Average, Across All 15 Equity Markets: <ul><li>MISS THE BEST 10 DAYS in a year resulted in portfolios 50% LESS valuable than passive investment in the S&P 500 Index. </li></ul><ul><li>AVOID THE WORST 10 DAYS and portfolios are 150% MORE valuable than passive investment. </li></ul><ul><li>Given that 10 days is 0.1% of the total days in the market, the odds against market timing are staggering. </li></ul>
  25. 25. An Inconvenient Fact <ul><li>Between 1966-1982 , the stock market’s average </li></ul><ul><li>annual real rate of return compounded annually: </li></ul><ul><li>- 6% per year </li></ul><ul><li>for 16 years! </li></ul><ul><li>“ That’s a bear market and it’s something </li></ul><ul><li>we may experience again.” </li></ul><ul><li>Source: Art Laffer Ph. D. Laffer & Associates </li></ul>
  26. 26. $1 Million Rollover with 5% Annual Withdrawal S&P 500 January 1, 2000 to Octoer 31, 2008 Jan 1, 2000 Jan 1, 2001 Jan 1, 2002 Jan 1, 2003 Jan 1, 2004 Jan 1, 2005 Jan 1, 2006 Jan 1, 2007 1/1-10/31/08 $1,000,000 $ 863,455 $ 716,735 $ 519,387 $ 604,007 $ 614,283 $ 591,989 $ 627,623 $ 609,335 $ 50,000 $ 50,000 $ 50,000 $ 50,000 $ 50,000 $ 50,000 $ 50,000 $ 50,000 $ 50,000 $ (86,545) $ (96,720) $(147,348) $ 134,620 $ 60,276 $ 27,706 $ 85,634 $ 31,712 $ (183,685) $ 863,455 $ 716,735 $ 519,387 $ 604,007 $ 614,283 $ 591,989 $ 627,623 $ 609,335 $ 375,650 -9.11% -11.89% -22.10% 28.68% 10.88% 4.91% 15.80% 5.49% -32.84% Year Dollars S&P Performance Return Beginning Balance Jan 1 Withdrawal Dec 31 Ending Balance S&P Annual Return
  27. 27. So… let’s just get this straight: <ul><li>If you were 65 when you invested $1,000,000 in the S&P 500 Index on January 1, 2000… </li></ul><ul><li>And you withdrew 5% or $50,000 annually. </li></ul><ul><li>Your balance was $375,650 - Halloween, 2008? </li></ul><ul><li>$375,650? And you’re now 73 years old? </li></ul><ul><li>Repeat after me: </li></ul><ul><li>“ Would you like to see that in a pump or a loafer?” </li></ul>
  28. 28. So, What Are the Risks to Income? <ul><li>Tax Risk: Withdrawals from most retirement plans are taxable as ordinary income. </li></ul><ul><li>Longevity Risk: Risk of running out of money during one’s expected lifetime, which is longer than ever. </li></ul><ul><li>Sequence Risk: Withdrawing funds from a portfolio during down years can mean running out of money before reaching your life expectancy and a reduction in your standard of living. </li></ul>
  29. 29. TAX RISK <ul><li>Tax cuts are set to expire in 2010. </li></ul><ul><li>78 million retiring will place huge burden on Social Security & Medicare. </li></ul><ul><li>Risk of higher taxes in future threatens your future “spendable” income and your lifestyle. </li></ul><ul><li>Top earners are unlikely to be in lower tax bracket in retirement. </li></ul>
  30. 30. LONGEVITY RISK <ul><li>Probability of one member of a 55 year-old couple living to age 80 is 81%. </li></ul><ul><li>To Age 85… 62%. </li></ul><ul><li>To Age 90… 36%. </li></ul><ul><li>The Office of the Actuary, Social Security Administration, 2008 </li></ul>
  31. 31. SEQUENCE RISK <ul><li>A portfolio’s value can be devastated by losses in the 10-15 years preceding retirement. </li></ul><ul><li>Investment in equities can protects against inflation, but offers inherent risk of market downturns. </li></ul><ul><li>No one should plan on withdrawing more than 5% annually from a portfolio invested in the stock market. </li></ul>
  32. 32. Retirement Plan Industry Lacks Solutions <ul><li>Focus of current investment strategies is to maximize the annual returns from market investments. </li></ul><ul><li>Current definition of “diversification” applies only to asset class. It’s goal is to optimize returns within a risk tolerance framework. </li></ul><ul><li>Retirees will now require their accumulated assets to be “longevitized” by protecting against the risks of market downturns, higher future taxes, and longer lives. </li></ul>
  33. 33. Some Notable Quotes: <ul><li>“ While the traditional focus of financial planning has been on asset accumulation, the aging of baby boomers will result in a focus on retirement income generation.” (Prudential) </li></ul><ul><li>“ Until we took notice of the fact that the oldest boomers would soon be retiring, financial planning was all about asset accumulation.” (David Drucker) </li></ul><ul><li>“ Advisors are focused in on asset allocation and selecting securities — which isn’t good enough when creating guaranteed retirement income.” (Chuck Robinson, Northwestern Mutual) </li></ul>
  34. 34. Changes in Executive Benefit Plans… <ul><li>Companies need to begin offering executive benefit programs that help top earners create predictable retirement income. </li></ul><ul><li>Some should consider STOPPING contributions to 401(k) plans at age 55, when largest amounts exposed to market risk, unable to diversify properly, and relatively less attractive fund menu. </li></ul>
  35. 35. What is a Target Income Plan? <ul><li>An after-tax, supplemental executive retirement program focused on creating predictable, tax-free, and/or guaranteed lifetime income for retirement. </li></ul><ul><li>Designed to help answer the question: </li></ul><ul><li>How much money will I receive each month once I stop receiving a paycheck from work and how long will that income last? </li></ul>
  36. 36. Three Tenets of Target Income Plans: <ul><li>Some percentage of your portfolio should be invested in order to create a source of tax-free income available during retirement. </li></ul><ul><li>Some percentage, while invested in the equities market, should have downside protection of guaranteed annual returns, or principal protection. </li></ul><ul><li>Some percentage should be invested to create guaranteed income that you and your spouse can’t outlive regardless of market conditions. </li></ul>
  37. 37. Target Income Plans… Expand Your Definition of Diversification <ul><li>Protection from tax, longevity & sequence risks. </li></ul><ul><li>Investment products offered by top rated insurance and financial services companies, including Nationwide, AXA, Pacific Life & Prudential. </li></ul><ul><li>No forced withdrawals, some age restrictions apply. </li></ul>
  38. 38. Target Income Plans… From the Employer Perspective <ul><li>Participant funded, a cost-neutral benefit program. </li></ul><ul><li>No future liability, no ongoing administration. </li></ul><ul><li>No 409-A or ERISA, assuming properly structured. </li></ul><ul><li>Individually owned accounts are completely portable. </li></ul><ul><li>Can be customized based on specific needs. </li></ul><ul><li>Can include company contributions with vesting. </li></ul><ul><li>Highly efficient funding mechanism for SERPs and Nonqualified Deferred Compensation Plans. </li></ul>
  39. 39. And For Participants… Finally, a plan designed to help answer the all-important question: <ul><li>How much money will I receive each month once I stop receiving a paycheck from work, and how long will that income stream last? </li></ul>
  40. 40. Addressing Misperceptions… <ul><li>“ Life insurance is always a bad investment. Buy term and invest the difference.” </li></ul><ul><li>“ Annuities are expensive and they lock you in. You’re much better off investing directly in mutual funds.” </li></ul>
  41. 41. Institutionally Structured Variable Life Contracts Are Used by 75% of Fortune 500… <ul><li>Used to informally fund nonqualified plan liabilities at public companies. </li></ul><ul><li>Variable life contracts create tax-free retirement income without interest rate risk of bonds. </li></ul><ul><li>Costs of insurance are de minimis compared with taxes resulting from mutual fund gains. </li></ul><ul><li>Diversified menu of separate account investment funds from top fund managers. </li></ul>
  42. 42. How Much Tax-Free Income Would You Like to Buy? $10,000 for 10 Years $25,000 for 10 Years $204,971 $512,426 None None $14,000 for 15 Yrs. ($615,000) $109,000 for 15 Yrs ($1,635,000) Annual Contribution Initial Death Benefit Annual Projected Income from 65 to 80 at 0% Annual Projected Income from 65 to 80 at 7%. $10,000 for 10 Years $25,000 for 10 Years $174,184 $435,460 None None $28,000 for 15 Yrs. ($420,000) $75,000 for 15 Yrs. ($1,125,000) $10,000 for 10 Years $25,000 for 10 Years $149,000 $371,523 None None $19,000 for 15 Years ($285,000) $50,500 for 15 Years ($757,500) 40 Year Old (Male/Female) Simplified Underwriting 45 Year Old (Male/Female) Simplified Underwriting 50 Year Old (Male/Female) Simplified Underwriting
  43. 43. Real Case Example: Male-45 Life Expectancy-85 <ul><li>Premium Paid Over 20 Years = $427,000 </li></ul><ul><li>7% Average Annual Return </li></ul><ul><li>Tax-Free Income (65-85) = $1.32 Million </li></ul><ul><li>VS </li></ul><ul><li>Mutual fund gains of $1.32 million, even if taxable only at today’s LTCG of 15%… $198,000 </li></ul><ul><li>Costs of insurance over 40 years = $50,000 </li></ul>
  44. 44. 5 Things We CANNOT Know… <ul><li>Whether the market will go up… or down… or when… or by how much. </li></ul><ul><li>When interest rates will be higher… or lower… or when it’s a “good time” to be in bonds. </li></ul><ul><li>Whether energy, currency, international funds, or commodities are good or bad ideas at any moment. </li></ul><ul><li>Whether gold will keep going up, or start going down. </li></ul><ul><li>When the current financial crisis will be over. </li></ul>
  45. 45. 5 Things We KNOW for Without Question: <ul><li>Everyone will need retirement income and highly compensated will need more than those earning less. </li></ul><ul><li>You cannot plan to take annual withdrawals from your stock portfolio of more than 5% in retirement. </li></ul><ul><li>Taxes near historical lows, may be higher in future. </li></ul><ul><li>Equities cannot be depended upon to produce consistent returns over time horizons of 10-15 years. </li></ul>
  46. 46. About Today’s Variable Annuities: <ul><li>According to SEC published data, the investment management cost of the average variable annuity is comparable to average mutual fund. </li></ul><ul><li>Mutual funds don’t offer guaranteed returns, or offer to provide guaranteed lifetime income. (Riders guaranteeing returns & lifetime withdrawals cost 75 basis points, individual, & 90 basis points, couple.) </li></ul><ul><li>Variable annuities offer guaranteed 10% minimum annual returns that feed guaranteed lifetime income, and many new types and features are available. </li></ul>
  47. 47. Variable Annuity Example: <ul><li>Rollover qualified $1,000,000, invest in equities market. </li></ul><ul><li>Guaranteed minimum annual return of 10% simple means your income account balance will double in 10 years to $2 million. </li></ul><ul><li>Ability to schedule systematic withdrawals of 5% annually, or $100,000, that cannot be outlived by either spouse, and regardless of how markets perform. </li></ul><ul><li>Total cost of annuity & riders between 2-3% depending on guarantees selected. </li></ul>
  48. 48. Target Income Plans The Key Difference: <ul><li>Conventional wisdom puts emphasis on pre-tax contributions, and asset diversification to reduce risk as retirement age nears. </li></ul><ul><li>Target Income Planning shifts focus to certainty and predictability of retirement income. </li></ul>
  49. 49. Enrolling in a Target Income Plan… <ul><li>Participants begin by “targeting” an amount of income, when it should begin, and how long it should last. </li></ul><ul><li>Then shown how to invest in order to achieve that targeted amount, on either tax-free or guaranteed basis. </li></ul><ul><li>Full disclosure of all conditions, limitations, fess, charges, and costs associated with the plan using “window sticker” tools. </li></ul><ul><li>One-on-one and group meetings ensure participants have complete understanding of vehicles offered. </li></ul>
  50. 50. PRB Financial’s Executive Compensation Practice <ul><li>Los Angeles based executive benefits firm with 50 year history administering qualified & nonqualified plans. </li></ul><ul><li>In-house TPA administers 2,000 DB & DC plans with more than $2 billion in assets. </li></ul><ul><li>Offices in Century City & New York City. </li></ul><ul><li>Insurance licensed in 50 states. Securities offered through Ameritas, Member FINRA/SIPC. </li></ul>
  51. 51. SHARED WORK ARRANGEMENTS - 50-50 SPLITS PRB Financial’s Executive Compensation Experts <ul><li>Experts in design, informal funding and administration of nonqualified executive benefit programs with experience working with Fortune 500 executives. </li></ul><ul><li>Designed plan solutions & educational programs for Merrill Lynch, JPMorgan, and Towers Perrin. Co-chairs authors of: “Simplified Guide to Nonqualified Deferred Compensation”. </li></ul><ul><li>On-site and online educational seminars, customized enrollment materials, and one-on-one meetings. </li></ul><ul><li>Products offered by top-rated carriers with little or no leverage or exposure to mortgage backed securities. </li></ul>
  52. 52. In Conclusion… <ul><li>Target Income Plans offer a new way of looking at retirement investing that shifts the focus from return on investment to certainty of income. </li></ul><ul><li>78 million baby boomers will NEED to start allocating a portion of their nest eggs to creating predictable retirement income. </li></ul><ul><li>Current economic meltdown is likely to have lasting impact on a generation’s attitudes about investing. </li></ul>
  53. 53. In Conclusion… <ul><li>Because if you’re 10-15 years from retirement, the market’s historical averages are about as relevant as a home’s appraisal from 2005. </li></ul><ul><li>Target Income Plans </li></ul><ul><li>The Outcome is Income SM </li></ul>
  54. 54. THE END/BEGINNING <ul><li>Thank You </li></ul><ul><li>(And I’m sorry if I disturbed you. Don’t worry, you can just go back to not opening your monthly statements and you’ll soon forget the whole thing.) </li></ul>