Good Afternoon and thank you for joining me today. My name is [insert name] and I am a [insert title and name of company]. Today we are going to talk about Retirement Income and what you can do to keep your retirement dreams on course.
To do so we will first determine what way you are headed, then discuss what the retirement road map looks like, and finally we will identify income sources that will fuel your retirement years.
[SLIDE BUILDES PER QUESTION]Okay, you’re ready to start setting your coordinates for retirement. These days you have more options to consider. Will you choose a direct path to a traditional retirement, or decide to explore a “phased approach” that allows you to continue working on yourterms and schedule? What will an average day look like? Where will you live? Take some time to explore and define your vision of life in retirement. Record your thoughts in the space allowed. Whatever your course, it’s important that your vision matches upwith your financial strategy. Use your answers as a great way to help you get headed in your desired direction.Retirement brings more freedom when it comes to how you’ll spend your time. Imagine how your days will unfold. Will you travel? Spend time in leisure or family-related activities? Retirement can be a fulfilling time devoted to your passions, hobbies and pursuits. Do you have an inner amateur geologist, gardener or woodworker waiting to be set free? How you spend your time can have a significant impact on your retirement finances. Many people continue to work – some out of necessity, while others simply enjoy the sense of purpose and achievement that working can provide. Some individuals transition into retirement over a period of time; choosing part-time or volunteer work. Still others will test their entrepreneurial spirit with a new business venture. If you do plan on continuing to work in some capacity, how long will that last?Are you part of the “sandwich generation?” Many retirees find themselves providing financial and personal support for parents and or children or grandchildren – sometimes unexpectedly and simultaneously. Exploring the potential cost of that support in time and dollars will help you prepare a strategy that keeps you on course.Will you stay put? Moving cross country to be closer to family? Or are you considering purchasing a second home? Downsizing? Where you live in retirement affects your income as well as your emotional, social and physical well-being. When considering a move, many retirees carefully weigh the lifestyle benefits of a new climate or location with the income tax treatment of their home in the state where they choose to reside. Purchasing a second home or seasonal residence also has implications that affect your finances and your day-to-day happiness. Consider how your location and living situation will adapt to your needs as you age – for example is your home a single level? Will maintenance become an issue?
As you can see by your answers to the previous questions, there are a lot of options in retirement. As retirement has been redefined by the boomer generation, these types of retirees have become more common. What type will you be? This will help us better map out your individual retirement course.Traditional: these are individuals who withdraw “cold turkey” from the 9-5 grind to pursue full-time leisure, volunteerism, and time with family, etc.Downshifter: an increasingly popular retirement option, many individuals incorporate some form of paid work – whether out of need for income or satisfaction – as they gradually wind down their working years.Playcheck: this is what retirees get by taking on part-time employment or temporary work to generate enough extra income to pay for travel or expensive hobbies without accessing other retirement funds.Jhobbie: a retiree who turns a hobby into a job that generates some supplementary income. Boomer Entrepreneur: someone who retires from their first career and starts their own business or venture.Sandwich Generation: caught between caring for parents and children who require financial, physical and emotional support, these retirees wrestle with hefty obligations of both time and money. With the added burdens of work and personal issues, as well as the need to contribute to their own retirement, these individuals are under significant stress.
Now that we’ve answered some basic questions to begin your retirement journey we can start calibrating to your destination.There are typically three phases to retirement (read slide).In the next few slides I will take you through these phase and key considerations of each phase.
This initial phase generally includes the last few years of full-time employment or you’ve just started phasing into and adjusting to retirement. Typically it involves an intensive period of gathering financial information, and exploring different retirement scenarios. Ideally you’ll use this time to maximize retirement savings, pay down debt and develop a specific financial strategy which includes an analysis of:• The current mix and suitability of the investments in your portfolio• Your current assets• Your anticipated future expenses vs income• When you want to begin receiving Social Security benefits• How you’ll manage healthcare costs that aren’t covered by Medicare• The tax impact of drawing down your assets over timeIt’s also a great time to test drive your passions in life, whether you choose to return to a classroom, travel, spend more time with family, pursue a favorite pastime or start a business. Gearing up is all about exploring and preparingGearing up is all about exploring and preparing for the next phase.
These are your mid-retirement years – often considered to be the most exciting period of retirement. You’re definitely hitting your stride – actively pursuing all the things you’ve wanted to do. You may still be engaged in some form of work, new business venture or volunteer opportunity. At the same time you’re doing a good job of actively managing your health. This may also be the time you choose to “downsize” from your current residence to a more carefree lifestyle. Financially you’re tracking spending and expenses and making adjustments along the way. You’re also managing your investments to provide an income stream. Sometime during this same period you’ll reach age 70½ – a milestone in your journey that may trigger requirements to begin taking annual withdrawals from your retirement plans and traditional IRAs.Taking off is all about maximizing your life experiences and keeping your financial footing for the next phase.
During this phase known as late retirement, your life may be quieting down. Patterns emerge, contentment sets in and managing your health may become a prime issue. This is a time when family takes on greater significance and many retirees consider leaving a legacy, if financial resources are available. At this stage it’s especially important to review both your medical and financial documents to make sure they represent your current wishes.
The first thing that we need to acknowledge is that Decumulation – creating retirement income is different from your accumulation phase. You have saved your money and invested assets for accumulation – congrats!Now it’s time to shift your focus on creating a retirement income that will keep your retirement dreams on courseDecumulation is different. In addition to the saving, investing, asset allocation and risk reduction strategies in accumulating for retirement, you need to understand techniques and products that will:Make the money last for an unknown period of time,Make trade-off decisions by balancing the need for consumption today with consumption needs of tomorrow.This may seem daunting, but I am here to help. The rest of the presentation will help you identify retirement road blocks and sources of income to fuel your retirement years.
We’ve covered some retirement roadblocks and discovered some best routes to help you avoid them. Now how are you going to ensure you will have enough fuel for your retirement journey?What are the sources of income you can use to fuel your retirement years? In the past, traditional pension plans and Social Security provided 61% of retiree’s income sources. In today’s world, that amount has shrunk to 27%.
The pie chart in the previous slide identified these four sources of income for today’s retirees – Pension Plans, Social Security, Personal savings and investments and employment during retirement. Lets explore each one a little deeper as each plays an important role in keeping your retirement dreams on course.
Personal savings and investments : Beyond pension plans and Social Security, it’s up to you to bridge the gap with your personal savings and investments that may include the following: employer-sponsored retirement plan, Roth IRAs, Annuities and diversified retirement income portfolio which may include stocks, bonds, mutual funds, Certificates of Deposit, savings bonds, real estate and other financial products.
Pension Plans : if you’re one of the fortunate 20% of Americans* who have a pension plan from your employer, thank your lucky stars. Your pension is typically a percentage of your final pay, based on your years of service. Your employer will typically offer you the following options for receiving your pension benefit: a monthly income stream over your lifetime, the lifetime of you and your spouse or as a lump sum distribution. Your decision should take into account your health, life expectancy, tax situation and your overall financial strategy. *Source: Employee Benefits Survey, Bureau of Labor Statistics, Program Perspectives, March 2009
Social Security: each year you should be receiving a Social Security benefit statement in the mail. Called the Personal Earnings & Benefit Statement (SSA 7004), it provides you with an estimate of your current and future Social Security benefits. You can also go online to view your statement and get more information about your Social Security benefits at www.ssa.gov. Keep in mind, benefits taken before your full retirement age may be considerably reduced. And if you do decide to phase into full retirement while collecting Social Security, your benefit may be subject to income tax depending on your total household income.Social Security was never intended to meet all of your retirement needs. It was created to be a forced savings plan that supplements pensions and savings in retirement. According to the Social Security Administration, it will provide less than ½ of what you need.
Employment during retirement: Working in your retirement is becoming the new norm to supplement your income. Were you a Downshifter, Playcheck, Jhobbie, Boomer Entrepreneur or Sandwich Generation? If so you will fit into the 72% of Americans who are currently employed said they intend to continue working after they retire. However, be cautioned that whenyou look at only 34% of current retirees continue to work. Working longer can provide both financial and social benefits, but keep in mind that you may end up retiring sooner than you expected due to layoffs, health or other life changes as was seen in the 2009 Retirement Confidence Survey (a research report from the EBRI Education and Research Fund) that found 47% of retirees retired sooner than planned.
Lets begin by turning our attention to mapping financial detours and road blocks on your retirement journey. The four retirement roadblocks I would like to address with you today are:Living a longer life & staying healthy overThe effects of inflationCarrying debt into retirementHow you really spend your moneyWhen & how much to withdrawAs we move through these roadblocks I will give you “Best Route” guidance that will assist you of steering clear of these roadblocks.
The most important retirement income question is the one that no one can answer: How long does your income need to last?A successful retirement income strategy ensures your assets will last over your lifetime. But will that be for 20 years after youretire? For 30 or 40? Longevity risk is perhaps the biggest risk to a financially secure retirement. It’s the risk that you’ll live longer than you expected, and won’t have the resources to support yourself in the later stages of your life. The length of your retirement affects every facet of your retirement income strategy – how you should invest, protecting your savings from inflation, how much you can safely withdraw, and everything else. As you can see by this chart Americans are living longer than every before. This is a great thing, but many are still underestimating their life expectancies and therefore the financial resources they will need to make sure they don’t’ outlive their money. Looking more closely at the chart, you can see that at age 65 there is a 50% chance that men will live to 85, women to 88, and for couples at least one will make it to 92!
To hedge longevity, as you create your retirement income strategy, add 10 years to your projections for your life expectancy to avoid underestimating your needs. Keep in mind that: Healthcare cost can rise even faster than inflation.Fewer employers offering healthcare to retirees.Must account for this expense in your retirement income.Build your retirement assets well in advance of your intended retirement date too, since an illness, or reorganization at work can lead to an earlier than expected retirement date. Finally, back up your projections with the help and perspective of a financial advisor who has the expertise to help you stay on course.
The nextroadblock to take into consideration on your retirement journey is Inflation. Apart from the more recent attention to inflation in the media, you may not have given inflation much thought. The double digit inflation rates of the ‘70s and ‘80s are only a distant memory. But because inflation lowers the purchasing power of money, even a modest level of inflation can take a significant toll on your retirement purchasing power and lifestyle over time. That’s why it’s important to take inflation into account when developing your retirement income strategy. Inflation is the tendency of prices to increase over time decreasing your purchasing power. We will walk through a couple of charts to illustrate the impact of inflation on your retirement savings.Everyone understands as prices go up, purchasing power decreases, because each dollar buys a smaller portion of goods and services. But when you look at inflation in concrete terms – the cost of things you pay for every day – it's impact is more understandable. Consider this: At 3% inflation, the weekly groceries you purchased for $100 today might run $103 next year. While you might not think that‘s a big deal, factor that 3% over a longer period of time and it takes a serious toll on your standard of living. If prices continue to grow by 3% each year, in 25 years you'll need $209 to pay for those same groceries, an increase of 109%. So if your income isn't keeping up with the pace of inflation, you'll lose financial ground over the long term. As the chart shows, inflation reaches into your retirement wallet and steals away more and more of your hard-earned dollars.
Inflation can also affect the value of your investments Not only does inflation increase the cost of goods and services, it can also eat into your investment returns – that’s especially true of fixed investments. For example, let’s assume you purchase a $10,000 Treasury bill with a 5% annual interest rate and hold it for one year. At the end of that year, you receive $10,500. But if inflation increased by 3% that year, your earnings would really be 5% minus 3% (or 2%), or $10,200. So in order to gain real value, investments must earn a rate of return that’s higher than the rate of inflation.Although past performance doesn’t guarantee future results, historically both equity and bond investments have outperformed inflation. The graph above right illustrates how the long-term appreciation of stocks, bonds and cash relates to inflation, as measured by the CPI. The chart illustrates the hypothetical value of $1 invested at year-end 1926 and assumes reinvestment income and no transaction costs or taxes. Of course, it is for illustrative purposes only and isn’t indicative of any particular investment.
A good benchmark for developing your inflation rate assumption is the Consumer Price Index measured over a longerperiod of time. Add in a margin of 1% or more to that figure. Using this approach, you’ll end up with a range of 3.5%-5% for your long-term inflation rate. Keep in mind, inflation and its effects are unpredictable. You and your advisor should keep track of the actual rate so you can make any adjustments along the way.
Carrying debt into retirement can be a major roadblock. A study by Securian Financial Group found that almost one-fourth of retirees owed as much as they had saved. Bringing debt into retirement restricts your financial flexibility, reduces retirement income and affects your ability to have a comfortable retirement.
Make it a financial priority to retire debt-free, and ideally mortgage-free.
How you really spend your money in retirement?As this chart illustrates you may be surprised at what you anticipate spending versus what you actually spend in retirement. This may leave many unprepared.In a recent survey sponsored by Securian, people over age 70 were asked to compare their actual expenses to their expected expenses. According to this snapshot in time, many retirees overestimated how much they would spend on health care and underestimated how much they would spend on:Leisure & Travel,Home and mortgage and Taxes. The greatest gap in planning was in the area of taxes, with an estimated 12% target vs. an actual expense of 23%.
This introduces another retirement roadblock - Replacement Ratio. Some retirees approach retirement planning with precision. They know exactly how much income they will need. For the rest of us,using a “replacement ratio” is a good approach to estimating retirement income. This simple calculation allows you to quicklyestimate the percentage of your working income you’ll need once you retire. It assumes that your post retirement lifestyle will mirror the lifestyle supported by your current income.The replacement ratio helps you figure out how much income you’ll need to maintain your pre-retirement lifestyle. The ratio most commonly cited is 70 to 85 percent of pre-retirement income. Those percentages are based on the assumption that you’ll need less income at retirement because:• You won’t have work-related expenses.• Your taxes will decrease because some of your income (Social Security, for example) may not be taxed or will be taxed at a lower rate.• You’ll no longer need to save for retirement.• You won’t have dependents to support.• You won’t have debt to pay off.The replacement ratio is one of those “rules of thumb” that sometimes takes on more authority than merited. If you view it more as a ballpark estimate than an ironclad formula, it can be a useful tool.
Use the replacement ratio calculation as a guideline when retirement is five or more years away. Once you’re nearing retirement(or if you’ve already retired), begin detailed tracking and analysis of your expenses and your projected retirement income. Work with a financial advisor to develop strategies to help you meet your retirement income needs, including ways to reduce expenses or increase income once you retire. Your financial advisor can also help you identify financial challenges you may face in retirement and develop approaches for addressing them.
When developing a strategy for withdrawing retirement savings, many individuals base their assumptions on an average annualinvestment returns number, like 6%. They assume so long as they keep withdrawals under that amount, their money should lastthroughout retirement. Unfortunately, they’re overlooking the importance of timing.It’s not just how much your investments go up or down, it’s also WHEN the ups and downs occur. WHEN your portfolio goes upand down can have a dramatic impact on your retirement income – significantly affecting your retirement portfolio’s ability to last as you make needed withdrawals. It’s crucial that you understand this interplay between timing or “sequence of your returns” and your rate of withdrawals, so you can minimize the potential risk that early poor returns can have on your long-term retirement income.Simply put, sequence of returns is the order of your investment returns. It can become a risk when you approach retirement and begin making withdrawals. If you’re fortunate enough to experience strong returns in the early years, you may not have any problems. But poor returns and withdrawals early in retirement can do lasting damage to a portfolio. To illustrate how sequence of returns risk works, we’ll look at a hypothetical example of two different couples who are justentering retirement: Jeff and Wendy and Dave and Joan. We’ll reverse the rate of return sequence for each couple’s investment, and illustrate the impact.
Using average returns to develop a retirement income portfolio can be insufficient when you need to generate a dependable long-term income. To help you overcome this challenge:• Determine how much of your income comes from guaranteed sources: Social Security, pension plans and annuities. If your portfolio doesn’t include any guaranteed sources, consider using annuities to guarantee income into the future. The guarantees for annuities are based solely on the financial strength and claims-paying ability of the issuing insurance company.• Identify essential, fixed income needs and discretionary expenses. Adjust discretionary expenses during down markets.• Consider working with a financial advisor to help you determine a balance of guarantees and growth that will help you generatedependable long-term income that also takes the sequence of returns challenge into account.
Make the right turns with a knowledgeable guide. Retirement can be one of the most personally rewarding, but financially challenging periods of your life – and it’s important to get the right directions before you set out on your journey. A financial advisor with retirement income expertise and experience will help you map out a strategy that sets you off on your course, and provides for any challenges, adventures or changes of heart along the way. Keep your retirement dreams on course, talk to your advisor about your retirement dreams today.
Keeping your dreams on course<br />Define your destination<br />Phases of retirement <br />Your financial fuel<br />Financial roadblocks & detours <br />Make the right turns with a knowledgeable guide<br />3<br />
Which way are you headed?<br />How will you spend your time?<br />Will your retirement include work?<br />Who will depend on you for personal and financial support?<br />Where is “home base” during retirement?<br />5<br />
What kind of retiree will you be?<br />Traditional<br />Downshifter<br />Playcheck<br />Jhobbie<br />Boomer Entrepreneur<br />Sandwich Generation<br />6<br />
Decumulation is different <br />Accumulation:<br />Saving<br />Investing<br />Asset Allocation<br />Decumulation:<br />Making the money last<br />Trade-off decisions<br />Asset depletion is inevitable<br />Source: Securian Financial Group 2008 Financial Challenges of the 70-75 year old Millionaire Investor. All rights reserved.<br />13<br />
Sources of Income<br />Personal savings and investments<br />Pension Plans<br />Social Security<br />Employment during retirement<br />15<br />
Personal savings and investments<br />401k plans<br />IRA’s<br />Annuities<br />Stocks<br />Bonds<br />Mutual Funds<br />CD’s<br />Real Estate<br />Investments will fluctuate and when redeemed, may be worth more or less than originally invested.<br />16<br />
Pension Plans<br />Monthly income stream<br />Lump sum distribution<br />Retirees need to create their own retirement income<br />17<br />
Social Security<br />Personal Earnings & Benefit Statement<br />Check benefits at www.ssa.gov<br />Benefits taken before full retirement age may be considerably reduced<br />Social Security Administration: Income of the Aged 2004 Chartbook, released September 2006<br />18<br />
Employment during retirement<br />72% intend to continue to work<br />34% of retirees currently working<br />47% retired sooner than anticipated<br />19<br />2009 Retirement Confidence Survey. A research report from the EBRI Education and Research Fund.<br />
Roadblocks<br />Living a longer life & staying healthy<br />The effects of inflation<br />Carrying debt into retirement<br />How you really spend your money<br />When & how much to withdraw<br />21<br />
The effects of inflation(This is showing the hypothetical value of $1 invested in 1926.)<br />This is a hypothetical value for illustrative purposes only and is not indicative of any particular investment. Past performance does not guarantee future results. You cannot invest directly in an index.<br />25<br />
Previous Graph Disclosure<br />Note: The data assumes reinvestment of all income and does not account for taxes or transaction costs. The average return represents a compound annual return. Government bonds and Treasury bills are guaranteed by the full faith and credit of the United States Government as to the timely payment of principal and interest. Stocks are not guaranteed. Small company stocks are more volatile than large company stocks, are subject to significant price fluctuations and business risks and are thinly traded. An investment cannot be made directly in an index. Past performance is no guarantee of future results.<br />Source:<br />• U.S. Small Company Stocks — Represented by the fifth capitalization quintile of stocks on the NYSE for 1926 - 1981 and the performance of the Dimensional Fund Advisors (DFA) Small Company Fund thereafter.<br />• U.S. Large Company Stocks — S&P 500 Index, which is an unmanaged group of securities and is considered to be representative of the stock market in general.<br />• U.S. Long-Term Government Bonds — 20-year U.S. Government Bond.<br />• U.S. 30-day Treasury Bill — 30-day U.S. Treasury Bill.<br />• U.S. Inflation — Consumer Price Index.<br />
The effects of inflation<br />Use Consumer Price Index (CPI) + 1%<br />3.5% - 5% historically<br />Most retirees need some exposure to equities<br />Unpredictable – need to adjust along the way<br />27<br />
Carrying debt into retirement<br />Debt restricts your financial flexibility <br />Reduces income<br />Affects your ability to have a comfortable retirement<br />28<br />
How you really spend your money<br />Target between 70 – 85% of pre-retirement income<br />Requires detailed tracking of expenses to get it right<br />31<br />
How you really spend your money<br />60% - 80% pre-retirement income<br />Increase that by 5% -10%<br />Adjust as necessary <br />32<br />
When and how much to withdraw<br />33<br />This is a hypothetical example for illustrative purposes only and is not indicative of any particular investment. Investments will fluctuate and when redeemed, may be worth more or less than originally invested.<br />
When and how much to withdraw<br />Determine how much of your income comes from guaranteed sources<br />Adjust discretionary expenses during down markets<br />Determine a balance of guarantees and growth<br />34<br />
Make the right turns with a knowledgeable guide<br />
Mapping your route<br />Think about how you want to spend your retirement<br />Watch for roadblocks<br />Take inventory of finances<br />Work with an advisor.<br />36<br />
Get started now!<br />Schedule a complimentary, no obligation, one hour consultation<br />37<br />