1. One of a series of papers on the
Confident Retirement®
approach:
Planning for a confident retirement
You can create a confident retirement through planning and creating
a clear road map for the future.
The Ameriprise Financial Confident Retirement approach provides
a straightforward framework for advisors and clients to create
a sound retirement plan to provide income for a lifetime. This
approach is designed to help you plan for an income stream that
covers both essential and lifestyle expenses, reduce vulnerability to
the unexpected and help you leave the legacy you desire.
For many Americans, the dream of retirement is on the horizon.
Even after spending decades saving and prudently investing for
retirement, many people are asking themselves if they can afford
to retire and how to make their income last over time. This insecurity
is not surprising, as today’s consumers face unique challenges,
including a prolonged period of market uncertainty and longer lives.
With the Confident Retirement approach, advisors have an
opportunity to provide clients with concrete strategies to address
the risks and challenges they face, and to help them put a confident
retirement in place.
Confident Retirement®
approach
Need Description Principle
Leaving a legacy Legacy is about giving to family, charities or causes that
are important to you.
Smart giving is about control and leverage.
Plan now for your legacy.
Preparing for the
unexpected
The unexpected are all those things that could get in the
way of retirement, such as an accident or disability.
Prepare for the certainty of uncertainty by covering
the unexpected.
Ensuring lifestyle Lifestyle expenses include the goals you have for your
retirement, like travel, dining out and hobbies.
Build flexible investment and withdrawal plans
to help ensure your lifestyle.
Covering essentials These are the necessities in life, such as a roof over your
head, medical expenses, utilities and food.
Guaranteed or stable income sources can help
cover essential expenses.
The principles of a Confident Retirement
The Ameriprise Financial Confident Retirement approach is built on four principles that match retirement income
sources and assets to fund the various liabilities or expenses encountered during retirement. This paper, one in a
series, will examine the four principles and how they can be applied to creating a retirement strategy for the future.
Confident Retirement®approach
2. 2
Principle #1 — Covering essentials
The foundation of any retirement strategy is to cover all essential
expenses that are considered predictable and recurring. These are
the ongoing necessities in life such as housing, food, utilities, taxes
and medical expenses. Because financial markets are uncertain,
we believe essential expenses should be covered by solutions that
offer guaranteed or stable income. Virtually all retirees already have
one or multiple forms of guaranteed or stable income in place, most
notably Social Security. Some may have access to a defined benefit
plan as well. However, if those sources are not sufficient to cover
essential expenses, other solutions may include:
• Certificates of deposit that pay a fixed rate of interest.
Backed by banks and the Federal Deposit Insurance Corporation
(FDIC), CDs have long provided a guaranteed or stable source
of income. Consider a laddering strategy that will allow you to
reinvest this money into longer-term CDs over time to earn the
most competitive yields.
• Annuities. Either fixed or variable annuities can generate a reliable
stream of income throughout retirement. Annuities can provide
stable income for a desired period of time, or for life. As an
alternative to a living benefit rider (available at additional cost),
annuitization may provide higher cash flows for older retirees.
Annuities’ unique features offer opportunities for income for
life, future income growth and the ability to invest in the market.
In return for the benefits they provide, variable annuities carry a
mortality and expense fee and subaccount management fees.
Other fees may include optional rider fees, surrender charges
and an annual contract charge.
• Government securities. Securities such as U.S. Treasury bills,
bonds and notes, and Treasury Inflation-Protected Securities pay
a stated interest rate over a period of years. Investors can choose
to lock in payments for up to 30 years in a long-term government
bond, or they can consider a laddering strategy that spreads
money out in bills, notes and bonds with different maturities.
These instruments provide a stream of income that does not
change over time, so you can count on payments that occur monthly,
quarterly or annually depending on the investment. And they are
backed by the government (U.S. Treasuries) or financial institutions
with back-up from the government (FDIC) or the claims-paying ability
of the issuing insurance company (annuities) and do not apply to the
performance of the variable subaccounts, which will vary with market
conditions. Payment streams are reliable, and principal is protected
from a risk of loss if held to maturity, in the case of CDs and
government securities. The principal in some of these investments
may be subject to fluctuation if sold before maturity (in the case
of bonds) and some will not (such as non-negotiable CDs). These
are options to deliver a regular, reliable income stream to fund all
essential expenses. This is consistent with the concept of matching
liabilities or expenses to income sources or assets. Essential
expenses won’t go away. Neither should income sources that
fund them.
Guarantee, as used in this material, depends
upon the ability of the issuing entity to honor
and pay the amount you may be entitled to.
U.S. Government bonds are backed by the
full faith and credit of the U.S. Government.
Certificates of deposit are FDIC-insured up
to $250,000 per depositor. Insurance and
annuity products are backed only by the
continued claims-paying ability of the issuing
company. It is possible that an issuing entity
may not be financially able to meet income
guarantee obligations.
3. 3
Principle #2 — Ensuring lifestyle
While covering essential expenses is a foundational first step, most
people who are planning for retirement have additional goals they
wish to pursue. These can include travel, hobbies that may have
associated expenses (such as golfing or sailing), purchasing a
second home, and so on. In the most basic sense, these must be
considered “optional” expenses. As such, retirees could tap other
assets in their portfolio, outside of guaranteed or stable sources
like those used to pay essential expenses.
Using multiple product types (e.g. annuities, managed accounts,
individual securities, mutual funds, alternative investments and cash
value life insurance), provides flexibility and choice to address future
income needs. Product diversification goes a step further than asset
allocation to combine financial products with different features that
work together to help manage risk in volatile markets. For example,
an annuity can be used to create a guaranteed income floor. With
this in place, the balance of the portfolio can potentially be invested
more aggressively to help generate sufficient growth to meet income
needs well into the future.
Advice-embedded solutions use sophisticated, active investment
management that includes asset allocation, investment selection,
risk management and dynamic reallocation. These attributes can
make them particularly appropriate for retirees by potentially reducing
emotionally driven decisions by investors during fluctuating markets.
Advice-embedded solutions are available to meet such specific goals
as growth, preservation and income. There are even tax-sensitive
advice embedded solutions. Portfolios can be dynamically managed
in alignment with an investor’s risk tolerance and time horizon.
At Ameriprise, we believe that investments to
support lifestyle expenses should be arranged
in three categories:
• Strategic cash — We recommend keeping sufficient
assets in cash to cover up to three years of lifestyle
expenses. This can help prevent the need to sell off
investment assets at inopportune times. Examples
include savings and checking accounts, certificates
of deposit (CDs), and money market mutual funds.
• Income investments — Meeting at least some
of the lifestyle needs through income-generating
investments helps reduce susceptibility to steep
withdrawals and allows for greater confidence in
meeting long-term objectives. Set aside a portion of
assets in income-generating securities to generate
at least some of the lifestyle need. This can balance
the need to grow the lifestyle income stream with
inflation, and protect against downside risk. This
can also help reduce the possibility of excessive
asset sales to produce needed income, especially
in down markets. Examples include bonds and bond
funds, managed accounts with an income focus and
fixed annuities.
• Growth investments — In order to maintain
purchasing power and drive long-term growth,
allocate a portion of the assets to securities
that have the potential to grow over time.
Examples include stocks, equity-based mutual
funds, managed accounts with a growth focus,
alternative investments, variable annuities and
cash value life insurance.
Covering the first 3–5 years with
flexible assets and/or
stable investments should
allow you to manage cash
flows through recessionary
periods similar to those
we’ve seen in the past.
4. 4
The question of withdrawal rates
How much money will you need for lifestyle expenses and
will that base of assets be sustainable over time? Most
people should assume they will spend 25 to 30 years in
retirement given that the average 65-year-old lives to 84.1
Therefore, depending on your lifestyle choices, you will need
an appropriate base of assets.
A general rule of thumb is that this base of assets, properly
diversified, can last 30 years if you withdraw 4% or less
(adjusted annually for 3% inflation).
Of course, individual circumstances will vary. Investors must
recognize that changes in market conditions and performance
of specific investments chosen could alter this calculation.
Because both the markets and a retiree’s expenses can be
unpredictable, it is vital to conduct a review at least annually.
Four reviews per year may be more suitable depending on
the depth of issues to be addressed.
If expenses exceed the sustainable withdrawal rate,
adjustments should be considered. Major expenses,
such as an expensive vacation, can be delayed or reduced.
Alternatively, supplemental income sources can be identified
to overcome a shortfall.
This analysis was created using probability modeling
to determine the likelihood that inflation-adjusted
withdrawals can be sustained over 30 years.
Probability modeling uses statistical samples of
values for inflation and investment growth rates to
run many different trials. The historical returns were
from 1960 through 2011 for hypothetical portfolios.
The hypothetical portfolio is assumed to have a
moderate allocation as follows: 10% cash, 40%
bonds and 50% equities. The indices used were:
Cash: U.S. 30-day Treasury Bill; Bonds: 1960-1975
U.S. Intermediate Government Debt plus the median
premium for the Barclays Capital U.S. Aggregate Bond
Index, 1976-2011 Barclays Capital U.S. Aggregate
Bond Index; Equity: Center for Research in Security
Prices (CRSP) includes the New York Stock Exchange,
American Stock Exchange and NASDAQ Stock Market,
Deciles 1-10: Inflation: U.S. Department of labor – U.S.
Consumer Price Index – Not Seasonally Adjusted. Indices
are unmanaged and do not incur management fees or
other expenses. You cannot invest directly in an index.
Past performance is no guarantee of future results.
There is no guarantee that investment objectives will
be satisfied or that return expectations will be met.
The data assumes reinvestment of dividends and
does not account for taxes.
Withdrawal rates vs. success
Withdrawal rate
Probability of your
money lasting 30 years
4% 92%
5% 71%
6% 44%
7% 22%
8% 9%
9% 3%
1
Health United States, 2011, U.S. Dept. of Health
and Human Services, Centers for Disease Control
and Prevention, National Center for Health Statistics.
5. 5
2
U.S. Department of Health and Human
Services, National Clearing House for
Long Term Care Information, October 2008.
3
2012 Alzheimer’s Disease Facts and
Figures, Alzheimer’s Association.
4
What is the Distribution of Lifetime Health
Care Costs from Age 65?, Center for
Retirement Research at Boston College,
March 2010.
5
Overcoming Retirement Income Challenges
Facing Women, Insured Retirement
Institute, July 2012.
Principle #3 — Preparing for the unexpected
Unexpected events can have a devastating impact on retirement
plans. At this stage of life, retirees typically lack the financial
flexibility to make up for consequences to their retirement if an
unplanned event results in significant expense. The Confident
Retirement approach leverages specific solutions to mitigate
events that can have a big impact on a retirement plan.
The most significant concerns include:
• Protecting against expenses associated with long-term care
needs that can drain lifetime savings. Research shows that
about 70% of those age 65 and older will need some type of
long-term medical assistance.2
About half of those still alive at
age 85 will encounter Alzheimer’s disease, dementia or some
form of cognitive impairment.3
• Preparing for medical expenses in retirement. Data indicates
that insurance premiums (such as Medicare Parts B and D and
Medicare Supplement insurance), deductibles, co-insurance
costs and out-of-pocket expenses will add up to $200,000 or
more for the average American couple in retirement.4
• Insuring against personal liability risks with home, auto and
umbrella insurance policies. As individuals enter retirement,
they most often have the lifetime maximum amount of financial
assets they will ever have. These assets need to be protected in
our litigious society.
• Providing adequately for a surviving spouse or dependents in the
event of an untimely death. Remember, cash flows will change
at the death of a spouse. Survivor Social Security benefits,
survivor options, if any on a pension, and annuity payouts may all
be affected. And some expenses, such as real estate taxes, won’t
change when one member of a couple dies but others, such as
many lifestyle expenses, probably will.
Considering these risks, there are solutions and
strategies to mitigate these potential issues.
• A discussion of long-term care expenses is critical
considering the high percentage of retirees who
will need such assistance. Two ways of addressing
this risk should be considered — stand-alone
long-term care insurance, and a rider (available at
additional cost) on a life insurance policy that allows
an advance payment of a large portion of the death
benefit if it is used for long-term care expenses.
• Medicare is the primary medical-care plan for most
retirees. In addition to Medicare, most retirees will
need to examine Medicare supplemental policies,
or Medigap plans, that will cover the deductibles
and co-insurance amounts not paid for by Medicare.
There are many plans to choose from, so some time
and care should be taken examining the options.
• Consider a full review of property/casualty coverage
and a personal-liability umbrella policy. An uncovered
claim due to a lawsuit at this stage in life could
devastate the best-laid plans.
Women need to set aside considerably
more savings for health care in
retirement than men. This is due to
living to an older age and the rapidly
rising cost of health care.5
6. 6
Principle #4 — Leaving a legacy
Ensuring the wealth that you have accumulated is used to provide
for the individuals or causes that you care about most is an
important part of planning for a confident retirement. After accounting
for essential, lifestyle and unexpected expenses, the next step is to
create a legacy plan for any remaining assets. Effective legacy plans
address two critical features — control and leverage.
Control during retirement
As we age, the potential for some types of impairment rise, and as
a result you may not be able to exercise prudent control of your own
assets. Three documents — limited financial power of attorney, a
health care directive, and a living will — can ensure that assets are
utilized according to your wishes, even if you are unable to exercise
that direct control.
It’s also important to review how assets are titled. Up-to-date
beneficiary designations for financial accounts, a will and the use of
trusts, if appropriate, can help reposition assets to minimize taxes
due upon death.
Control beyond retirement
Wills, trusts and estate planning can be used to control the
use of assets beyond retirement. Planning for tax positioning of
assets upon death can both control where the assets go as well as
maximize the amount that passes to heirs or charities. The wrong
positioning can reduce the amount of funds that actually go to
legacy causes by up to 50% due to income, state and federal
estate taxes.
Leverage
Leverage is about ensuring that the maximum amount of assets
actually go to funding legacy goals, and minimizing the drain on
those assets from income and estate taxes. Life insurance is a
unique solution for providing leverage in any legacy plan, as it not
only provides a death benefit in excess of the premium, but the
death benefit passes income tax-free to the beneficiaries.
6
2012 Retirement Confidence Survey,
Employee Benefit Research Group.
• Those still a few years from retirement rely on their
income to build up their retirement nest egg. Yet 50%
of Americans find themselves retiring unexpectedly.
Of those, 51% leave the workforce due to health
problems or disability.6
Disability insurance is a key
way to mitigate this risk and should be considered
if it’s not already in place.
• There are numerous life insurance options for
meeting the income needs of survivors, meeting
unexpected costs and funding legacy wishes. Those
with a life insurance need can add a long-term care
rider to most permanent products (for an additional
fee) allowing a large portion of the policy’s death
benefit to be advanced to pay for qualified long-term
care expenses.
Ameriprise offers a special
beneficiary restriction option
for IRAs that provides more
control than a traditional
beneficiary designation.
It’s also less complex and
more affordable than a
formal trust agreement.
7. 7
Several common uses of life insurance
in legacy planning include:
• Addressing the tax burden of tax-deferred
qualified assets — Assets remaining in tax
deferred qualified plans (e.g. IRAs, annuities,
401(k)s) at your death are subject to income tax
on the beneficiary. If the beneficiary is a taxable
individual, as most family members typically are,
they will owe tax as they withdraw those assets.
On the other hand, if a legacy plan calls for both
individual and charitable giving, it is often most tax
efficient to leave the remainder of the qualified plan
to the charity which does not pay income tax, and
fund the individual legacy with life insurance —
which will be received tax free by the individual.
This solution can provide significant leverage by not
only providing for a charity but for an heir as well.
• Maximizing wealth transfer — For those fortunate
to have excess assets now that they can reposition,
life insurance can provide leverage for legacy
planning. Repositioning assets from taxable
accounts (e.g. brokerage, wrap accounts) to a
permanent life insurance policy can provide a death
benefit that can be several times the amount of
the assets repositioned. Plus they will pass to the
beneficiary free of income and possibly estate tax,
further maximizing the benefit to the legacy plan.
Consider your goals when evaluating the features
of individual life insurance plans.
For example:
• Cash value solutions can provide ongoing access to
assets during retirement
• Death benefit-only products can often maximize the
death benefit amount but limit access to the cash
value during retirement
• Adding a long-term care rider on a life insurance policy
(at an additional cost) can provide a tax-free benefit
to fund long-term care needs in retirement
Getting started
Enjoying a confident retirement is part of the American
dream. It’s taken planning and hard work to get this far
on the journey. Yes, there are still challenges to meet
as we live longer lives and cope with an uncertain
environment. But a confident retirement is within reach.
It all starts with a conversation. A simple conversation that
can help you feel more confident about:
• Covering your everyday essentials
• Ensuring your lifestyle goals
• Preparing for the unexpected
• Leaving a meaningful legacy
Contact your Ameriprise financial advisor today to begin
your conversation.
Additional papers in this
series include:
• A Confident Retirement
approach: Covering essentials
• A Confident Retirement
approach: Ensuring lifestyle
• A Confident Retirement
approach: Preparing for the
unexpected
• A Confident Retirement
approach: Leaving a legacy
Four simple principles. Practical solutions.
Working together, we can figure this out.
