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![Ameriprise Financial Services, Inc., offers financial advisory services, investments, insurance and annuity products.
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Helping You Plan for a New Retirement
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Helping You Plan for a New Retirement
This document summarizes Ameriprise Financial Services, Inc. and its offerings. Ameriprise offers financial advisory services, investments, insurance and annuity products through its RiverSource brand. It welcomes clients and is licensed in California. The document discusses helping clients plan for retirement through addressing key questions about how they want to spend retirement, ensuring they will have enough money, how to invest along the way, accessing funds in retirement, and leaving an inheritance.
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Helping You Plan for a New Retirement
- 1. Ameriprise Financial Services,Inc., offers financial advisory services, investments, insurance and annuity products. RiverSource® products are offered by affiliates of Ameriprise Financial Services, Inc., Member FINRA and SIPC. CA License #0684538. Welcome © 2006 – 2008 Ameriprise Financial, Inc. All rights reserved. 1/08 Helping You Plan for a New Retirement [Presenter name], [Presenter title] [Date]
- 2. 1 As of September30, 2007. Source: Ameriprise Financial Second Quarter 2007 Statistical Supplement, Page 3. 2 Based on the number of financial plans annually disclosed in Form ADV, Part 1A, Item 5, available at adviserinfo.sec.gov as of December 31, 2006. 3 Based on the number of CFP® professionals documented by the Certified Financial Planner Board of Standards, Inc.. • Approximately 2.4 million branded advisor clients1 • Ameriprise is America’s largest financial planning company2, 3 • More people come to Ameriprise for financial planning than any other company2
- 3. What would youlike to retire to? Rethinking retirement
- 4. > What willyou retire to? > Will you have enough money? > How should you invest along the way? > How to access your money when you need it? > What do you want to leave behind? The five key questions Rethinking retirement
- 5. > What willyou retire to? > Will you have enough money? > How should you invest along the way? > How to access your money when you need it? > What do you want to leave behind? The five key questions Rethinking retirement
- 6. • What doesretirement mean to you? • Take time to answer this key question • Indulge yourself. Go ahead and dream • Take “trial” retirements to see what you like What will you retire to? Rethinking retirement
- 7. > What willyou retire to? > Will you have enough money? > How should you invest along the way? > How to access your money when you need it? > What do you want to leave behind? The five key questions Rethinking retirement
- 8. • Step 1 >Document your current expenses • Step 2 > Project your future expenses • Step 3 > Determine your future income needs and sources Will you have enough money? Rethinking retirement
- 9. Will you haveenough money? Rethinking retirement How much will your retirement cost as a percentage of your current income? Document your current expenses Project your future expenses Determine your future income needs and sources
- 10. • Sources ofincome > Social Security > Qualified retirement plans > Stock options > Personal savings & investments > Part-time work *Source: Sources of Income for Older Persons in 2003, AARP Public Policy Institute, 2005. Document your current expenses Project your future expenses Determine your future income needs and sources Will you have enough money? Rethinking retirement
- 11. • Future incomeconsiderations > Live long, live well > Over half the people living today will live to be 82 years or older > Average CPI increase from 1963 – 2003 was 3.06% Document your current expenses Project your future expenses Determine your future income needs and sources *Source: Life Tables for the United States Social Security Area 1900 – 2100. Actuarial Study No. 116 by Felicitie C. Bell and Michael L. Miller. Will you have enough money? Rethinking retirement
- 12. $40,000 *Assumes an after-taxportfolio with a tax rate of 25%, 7% annual yield (a moderately aggressive risk tolerance portfolio), 4% annual inflation, and depletion of funds after a 30-year retirement. Does not take account of investment or product fees. Income is increased annually at rate of inflation. This information is shown for illustrative purposes only, and does not represent any specific product or investment. Your actual investment results will vary. Document your current expenses Project your future expenses Determine your future income needs and sources Will you have enough money? Rethinking retirement • How big of a nest egg will you need? • The size of nest egg you’ll need may surprise you > You may need retirement income for two or more decades > Use a modest withdrawal rate to avoid depleting your assets > Social Security is indexed for inflation, but some pensions are not Annual amount desired Nest egg needed* $85,000 $100,000 $963,922 $2,048,334 $2,409,804
- 13. • Will youhave enough money? > Most people have a gap between income and expenses > Plan to bridge the gap with your investments Document your current expenses Project your future expenses Determine your future income needs and sources Will you have enough money? Rethinking retirement
- 14. > What willyou retire to? > Will you have enough money? > How should you invest along the way? > How to access your money when you need it? > What do you want to leave behind? The five key questions Rethinking retirement
- 15. • Portfolio considerations >Asset allocation and rebalancing > Risk management > Tax management Asset allocation and rebalance Risk management Tax management Advanced strategies How should you invest along the way? Rethinking retirement Asset allocation does not assure a profit or protect against loss in declining markets.
- 16. • Asset allocation >Traditional asset recommendations focus on just three types of investment Asset allocation and rebalance Risk management Tax management Advanced strategies How should you invest along the way? Rethinking retirement Bonds offer a fixed rate of return and value is influenced by changes in interest rates. Stocks do not offer a fixed rate of return and fluctuate with changes in market conditions. Each asset class has specific risk characteristics. Talk to your advisor and understand these risks before investing. 32Stocks1 Bonds Cash
- 17. An investment ina money market fund is not guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund. Stocks of small- and mid-capitalization companies involve substantial risk. Historically, these stocks have experienced greater price volatility than stocks of larger companies, and they can be expected to do so in the future. Stocks of mid-capitalization companies may be slightly less volatile than those of small-capitalization companies but involve substantial risk. International investing involves increased risk and volatility, not typically associated with domestic investing, due to changes in currency exchange rates, foreign government regulations, differences in auditing and accounting standards, potential economic and political instability, limited liquidity, and volatile prices. The risks of international investing are particularly significant in emerging markets. There are risks associated with an investment in bonds, including the impact of interest rates, credit, and inflation. • Asset allocation – beyond the basics > Many investors don’t take full advantage of diversification opportunities within each asset class Asset allocation and rebalance Risk management Tax management Advanced strategies How should you invest along the way? Rethinking retirement – Large-cap – Mid-cap – Small-cap – Growth – Value – International – Long-term – Short-term – Government – Corporate – High-yield – International – Tax-exempt – Money market – CDs – Savings account – Tax-exempt money market 32Stocks1 Bonds Cash
- 18. *Source: Zephyr Associates,2004 *Ranking based on annual return for that asset class • Asset allocation > No investment outperforms all the time Asset allocation and rebalance Risk management Tax management Advanced strategies How should you invest along the way? Rethinking retirement
- 19. Asset allocation and rebalance Riskmanagement Tax management Advanced strategies How should you invest along the way? Rethinking retirement Risk management Inflation risk Market risk Default risk Interest rate risk Currency risk The possibility that your investment’s value will lag inflation The chance that your investment’s price will fall The chance that a bond issuer won’t be able to pay interest due The likelihood that bond prices will fall when interest rates rise The possibility that your investment will lose value due to fluctuations in foreign currencies
- 20. 1 Specific tax issuesmay require consultation with an attorney. 2 Dividends are taxed currently. Interest may be taxable even if not paid such as, but not limited to, Original Issue Discount. Capital gains, if any, are taxed when realized. Dividends and capital gains may be taxed at a lower rate. 3 Savings accounts are FDIC insured. 4 Withdrawal before age 59 ½ may result in a 10% IRS penalty. 5 Most annuities have a tax deferred feature. So do many retirement plans under the Internal Revenue Code. As a result, when you use an annuity to fund a retirement plan that is tax-deferred, your annuity will not provide any necessary or additional tax deferral for that retirement plan. But annuities do have features other than tax deferral that may help you reach your retirement goals. You should consult a tax advisor prior to making a purchase for an explanation of the tax implications to you. 6 Certain income may be subject to the alternative minimum tax, or state or local taxes. Taxable capital gains/losses may be incurred. 7 Necessary requirements must be met. Consult with your tax advisor. Asset allocation and rebalance Risk management Tax management Advanced strategies How should you invest along the way? Rethinking retirement Tax management1 – Taxable investment accounts2 – Savings accounts3 – Other cash reserves – Traditional IRAs4 – Traditional 401(k)s and 403(b)s4,7 – Fixed and variable annuities5 – Municipal bonds and funds6 – Roth IRAs4,7 – Roth 401(k)s (available starting in 2006)4,7 Taxable1 3 Tax-free2 Tax-deferred Investments using after-tax dollars for potential capital gains taxable (fully or partially) when realized, interest taxable (fully or partially) when accrued or dividends taxable (fully or partially) when paid. Investments using pre-tax dollars for tax-deferred growth; taxable when withdrawn. Investments and insurance using after-tax dollars for tax-deferred growth and/or potential tax-free income.
- 21. • Tax management >Taxable interest is taxed as ordinary income > Qualifying dividends taxed at lower rate through 2010 > Long-term capital gains generally taxed at lower rates > Retirement plan distributions taxed as ordinary income > Work with financial and tax advisors to create best strategies for your situation Asset allocation and rebalance Risk management Tax management Advanced strategies How should you invest along the way? Rethinking retirement
- 22. • A balancedtax strategy > Maximize employer-sponsored plan contributions > Consider additional tax-deferred savings – Traditional IRA – Variable annuity > Consider opportunities for tax-free earnings – Roth IRA • Maintain some assets outside tax-deferred accounts Asset allocation and rebalance Risk management Tax management Advanced strategies How should you invest along the way? Rethinking retirement Most annuities have a tax-deferred feature. So do many retirement plans under the Internal Revenue Code. As a result, when you use an annuity to fund a retirement plan that is tax deferred, your annuity will not provide any necessary or additional tax deferral for that retirement plan. But annuities do have features other than tax deferral that may help you reach your retirement goals. You should consult a tax advisor prior to making a purchase for an explanation of the tax implications to you. Annuitiesareinsuranceproductsthat arelong-term investment vehicles. Beforeyou invest, besureto ask your salesrepresentativeabout the annuity’sfeatures, benefits, risks, and fees, and whether theannuity isappropriatefor you based on your financial situation and objectives. Variableannuitiesaresubject to market risk, including thepotential lossof principal invested.
- 23. • Roth conversionconsiderations > If converting before 2010, taxpayer’s adjusted gross income for year of conversion must not exceed $100,000 > Until 2010, Roth conversions not available for married couples filing separately > After 2010 all individuals, regardless of income or filing status, will be able to convert to Roth IRA Asset allocation and rebalance Risk management Tax management Advanced strategies How should you invest along the way? Rethinking retirement • Benefits of Roth IRA > No tax on earnings. > Tax-free qualified withdrawals. > No required minimum distribution after 70 ½. > Stretch out may be available — to younger spouse, child or grandchild.
- 24. • Long-term care >Live with the risk and do nothing > Self insure > Transfer the risk to an insurance company • Most importantly – don’t put it off How should you invest along the way? Rethinking retirement
- 25. > What willyou retire to? > Will you have enough money? > How should you invest along the way? > How to access your money when you need it? > What do you want to leave behind? The five key questions Rethinking retirement
- 26. • Your personalchoices and decisions > Revocable > Irrevocable > Postpone-able How to access your money when you need it? Rethinking retirement
- 27. • Qualified plans– accessing your money > Leave money in plan > Begin withdrawals at/after age 59 1 /2 > Pre-59 1 /2 – Internal Revenue Code section 72(t) How to access your money when you need it? Rethinking retirement
- 28. • Roth 401(k)and Roth 403(b) plans – accessing your money > Begin tax-free withdrawals anytime after: – You turn 59 1 /2 AND – You have owned the account for five years > Rollover to Roth IRA* – No taxes due on direct rollover – Roth IRA not subject to RMDs How to access your money when you need it? Rethinking retirement *Upon rollover the value of your investment may be worth less than the original amount invested.
- 29. *Annuities are onlyone of many retirement strategies available. Talk to your financial advisor to find out whether an annuity fits your individual needs or situation. Most annuities have a tax-deferred feature. So do many retirement plans under the Internal Revenue Code. As a result, when you use an annuity to fund a retirement plan that is tax-deferred, your annuity will not provide any necessary or additional tax deferral for that retirement plan. But annuities do have features other than tax deferral that may help you reach your retirement goals. You should consult a tax advisor prior to making a purchase for an explanation of the tax implications to you. • Using annuities to create a stream of income* > Consider using a portion of your assets to buy an immediate annuity > Annuity generates steady stream of income you can’t outlive > With certain level of income guaranteed, you can invest remainder of your portfolio more aggressively – All guarantees are based on the continued claims paying ability of the issuing company and do not apply to the performance of the variable subaccounts, which will vary with market conditions. How to access your money when you need it? Rethinking retirement
- 30. > What willyou retire to? > Will you have enough money? > How should you invest along the way? > How to access your money when you need it? > What do you want to leave behind? The five key questions Rethinking retirement
- 31. • What isin your estate? > Home or home equity > Cars > Investments > Personal property > Other items or interests What do you want to leave behind? Rethinking retirement
- 32. • Expenses thatmay reduce your estate: > Estate taxes > Income taxes > Probate What do you want to leave behind? Rethinking retirement
- 33. • Understand beneficiarydesignations > Tax ramifications > Payout requirements > Ownership and beneficiary designations on your accounts What do you want to leave behind? Rethinking retirement
- 34. • Ask yourself… >What do I want to retire to? > Do I have the plan to get me there successfully? > Can I use any help? • Imagine your dream retirement. Then put a plan together to make it happen. What do you want to leave behind? Rethinking retirement
- 35. Let’s get started. AmeripriseFinancial Services, Inc., offers financial advisory services, investments, insurance and annuity products. RiverSource® products are offered by affiliates of Ameriprise Financial Services, Inc., Member FINRA and SIPC. © 2006 – 2008 Ameriprise Financial, Inc. All rights reserved
Editor's Notes
- #2 [Presenter off to the side of the room.] How was [lunch/dinner]? [Walk to the knowledge spot, which is front and center of the room. The non endorsement is off to the side of the room.] Thank you for taking the time for today’s program. My name is [name] and I’m with Ameriprise Financial. Our company has been in the financial services industry for over 110 years. We offer quality financial guidance, products and services that are grounded in a thoughtful planning process developed to help clients reach their goals. You received an invitation to [today’s/this evening’s] seminar for one reason: You are a successful person. And if you’re like many successful people I know, you’d like to eventually leave the hard work and long hours for a well-earned retirement. Achieving fulfillment in retirement, however, may not only require sound financial planning, but also exploring ways to determine what being fulfilled in retirement means to you. I’d like to talk today about how these two important planning processes can work together. From our perspective, retirement is a time when people are free to try all the things they didn’t have time for during their working years, such as volunteering, returning to school or even starting a new career. It’s an active “New Retirement” where anything is possible. Retirement planning has changed, too. With longer life expectancies — and disappearing company pensions — the responsibility for accumulating and managing assets for upwards of 30 years in retirement has shifted to the individual. Not surprisingly, retirement has become the #1 concern of the mass affluent. The guidance of an Ameriprise financial advisor can help you enter this phasewith confidence.
- #3 We offer financial guidance and financial solutions grounded in a unique and collaborative planning approach known as Dream > Plan > Track >. I use this approach to help my clients visualize their dreams, plan a path to get there, and track their progress along the way. With approximately 2.4 million branded advisor clients1 and more than 110 years of experience, Ameriprise Financial is America’s largest financial planning company.2, 3 More people come to Ameriprise for financial planning than any other company.2 We understand that financial priorities differ from person to person. Our approach to financial planning is based on an ongoing relationship with a financial advisor, so we get to know you and create a written financial plan — one that’s tailored to your needs. A plan with the flexibility to evolve with you and your dreams. For example, because we advise people at all stages of life, we encourage families to communicate about money. Maybe you’re looking for ways to strike a balance between supporting a child’s or grandchild’s education and still make sure all of your own future needs are met. Talking with each other — and talking to us — can lead to smarter decisions that will help you get closer to your dreams. Okay, now you know a little more about Ameriprise Financial. Any questions at this point? [WAIT FOR QUESTIONS.] Good. 1 As of September 30, 2007. Source: Ameriprise Financial Second Quarter 2007 Statistical Supplement, Page 3. 2 Based on the number of financial plans annually disclosed in Form ADV, Part 1A, Item 5, available at adviserinfo.sec.gov as of December 31, 2006. 3 Based on the number of CFP® professionals documented by the Certified Financial Planner Board of Standards, Inc..
- #4 You know, it wasn’t long ago that the stereotype of retirement was grandma at home cooking upa storm and grandpa playing chess with one of his buddies. At Ameriprise Financial, we like to say that “Dreams don’t retire.” We see today’s retirees approaching retirement as an opportunity to do new things and live their dreams. That’s because your generation is healthier, wealthier, more active and living longer than any preceding generation. However, the idea of chess is still relevant today. That’s because preparing for retirement is a lotlike a game of chess. We all started out many years ago with the same pieces on the board. We all chose a strategy and started moving our pieces around. Along with the gains, we all experienced a few losses. And now, as we anticipate our remaining moves, we all want to ensure that we can indeed achieveour goals. And that’s why I’m here with you today, to help you play to your strengths and minimize any weakness in your retirement game plan. Now each of you has played the game differently, so you likely have different concerns. With a show of hands, tell me what you’re thinking about: Are you worried that your money will run out? Are you looking for a better strategy to maximize your assets and pass them on? Are you looking for a second opinion? That is, you’re here to double-check your options. After we complete today’s presentation, I hope you go home feeling more optimistic about investing, but most important, your vision of retirement.
- #5 With that in mind, we believe there are five questions you should consider to achieve a fulfilling retirement. 1. What will you retire to?2. Will you have enough money?3. How should you invest along the way?4. How will you access your money when you need it?5. What do you want to leave behind?
- #6 Each and every one of you has the right to have financial freedom and personal fulfillment during your retirement. But you know what? It just doesn’t seem to happen that often. Many Americans retire not because they have this great vision of retirement, but because they can’t do the work anymore — due to health issues, a lack of career skills or corporate restructuring. Those are not positive reasons to retire. We believe in trying to retire to something, not from something. Create a vision of your retirement that gets you excited to live the rest of your life. What will get you absolutely excited to get out of bed every morning during retirement?
- #7 [NOTE TO ADVISOR: HAVE TWO FLIP CHARTS, ONE ON THE RIGHT SIDE OF THE ROOM AND ONE ON THE LEFT. FIRST ADDRESS PARTICIPANTS FROM THE FLIP CHART ON THE RIGHT SIDE.] Why do you work? What do you get out of work? [LET PARTICIPANTS ANSWER. WRITE DOWN ANSWERS SUCH AS MONEY, BENEFITS, SELF-FULFILLMENT, JOB SATISFACTION, COMPANIONSHIP AND FRIENDS, AND CHALLENGE. TAKE ONLY 60-120 SECONDS. WALK TO FLIP CHART AT THE LEFT.] Guess what: when you retire you are still going to need these things; money yes, but all the others as well. A fulfilling retirement is not just about money. I know it sounds simplistic, but the first step in retirement planning is to plan to retire to something. Take the time to define your retirement vision. Think about what you enjoy most, or what other things you’d like to accomplish. Retirement can be a time to discover new passions or explore interests you couldn’t dedicate time to during your working years. Try your ideas out. Take “trial” retirements to see what you like. Remember, your retirement could last a long time. The main message here is that the key to a fulfilling retirement is to develop a compelling vision of what you want to do. When we’re kids, people are always asking us, “What do you want to be when you grow up? A doctor? A lawyer? An engineer?” Then, when we’re adults, what we do, to a large extent, defines who we are. But no one ever asks us, “What do you want to be when you retire?” We’re so busy coping with the day-to-day responsibilities of job and family that we don’t think ahead; we don’t form a new vision. That doesn’t have to happen to you.
- #8 Now let’s look at our next key question: Will you have enough money?
- #9 The first step is to document your current expenses. If you were to retire now and live exactly as you live today (same cars, same vacations, same housing, etc.), what would it all cost? This is not necessarily your retirement income goal. But this first step will help you develop an expense target for your goal. In Step 2 you will answer questions such as: What expenses that you have now will be gone at retirement? What expenses will you still have at retirement? What new expenses will you have? For many of us, the costs of work clothing and commuting will disappear. But other expenses such as health care, insurance and travel will likely rise. And we haven’t even started talking about inflation yet. Can anyone think of other expense changes? (TAKE A FEW ANSWERS FROM THE AUDIENCE.) While each person’s situation is different, I think you are getting the general idea. In Step 3, you’ll develop a retirement income target based on a lifestyle that makes you feel comfortable and allows you to do the things you want to do. Your retirement income target helps determine what tax planning issues and strategies are most appropriate for you. Your goal will help determine your desired or needed after-tax return on investments. It can help determine the potential or projected growth or depletion of your estate. We believe these steps are essential in the retirement planning process. Our job is to determine the most effective strategy to help you achieve your desired objective. You can complete steps one and two at home, where your financial information is handy. But let’s take a little time now to look into key aspects of Step 3.
- #10 How much will your retirement cost as a percentage of your current income? The only way you can know is to envision your retirement lifestyle ahead of time, and then put a price tag on it.
- #11 Where will you get the money to pay for your dream retirement? Typical income sources include: Social Security Qualified retirement plans Stock options Personal savings and investments Part-time work Here’s an interesting question: How much of the average retiree’s income do you think each of these four sources compose? [TAKE A FEW ANSWERS FROM THE AUDIENCE] According to the AARP’s Public Policy Institute,* the sources of income for retirees age 65 and older in the top personal income quintile in 2003 included: 34.6% Earnings from employment 25.5% Company pension 19.2% Social Security 18.9% Personal savings and investments 1.3% Government assistance such as unemployment, veteran’s benefits, SSI, etc. 0.5% Other sources such as alimony or family assistance Of course, you aren’t likely to match the average. Now’s the time to plan your income sources for your specific needs. *Source: Sources of Income for Older Persons in 2003, AARP Public Policy Institute, 2005.
- #12 This is a compelling statistic because it implies that we are going to be living longer than the generation before us. For a lot of people, it adds to the concern that they might run out of money. This puts more pressure on our assets to provide income for more years than the last generation required. Source: Life Tables for the United States Social Security Area 1900 – 2100. Actuarial Study No. 116 by Felicitie C. Bell and Michael L. Miller.
- #13 So far we’ve found out that you’ll likely need a large percentage of your current income for what probably will be a long retirement. Considering the income you’ll likely receive from Social Security and perhaps a company pension, how big of an after-tax nest egg do you think you’ll need to achieve your income goal? The answer may surprise you. To generate just $40,000 per year over a 30-year retirement — adjusted annually for inflation — you’d likely need an after-tax portfolio exceeding $900,000. This assumes a 25% tax rate, 7% annual yield, 4% annual inflation and depletion of your funds to zero after 30 years. Please note: Lower maximum tax rates may apply to capital gains and dividends. This example does not account for any investment or product fees. Of course, actual conditions will vary, so your plan should anticipate changes in market returns and inflation over time. To explore how large a nest egg you’ll need to create the income you want, check out our retirement income calculators at www.ameriprise.com, and then discuss your results with your financial advisor. * Example assumes an after-tax portfolio with a tax rate of 25%, 7% annual yield (a moderately aggressive risk tolerance portfolio), 4% annual inflation, and depletion of funds after a 30-year retirement. Does not take account of investment or product fees. Income is increased annually at rate of inflation. This information is shown for illustrative purposes only, and does not represent any specific product or investment. Your actual investment results will vary.
- #14 If you find that there’s a gap between your Social Security/pension and the retirement income you’ll need, you’re in good company. Most people do. By determining the size of that gap, you can start to bridge it with taxable investment accounts, or with investments in your 401(k), other employer retirement plan, or IRAs, up to the contribution limits allowed by those plans. Create or review your plan now to help ensure that you can retire when and how you want. “How should you invest along the way?” is the question we’ll address next.
- #15 As with the previous questions, the answer to our third planning question will be different for each of you, based on your retirement income needs, current assets available, time frame, risk tolerance and other factors. But I can share some general investment strategy ideas that can likely benefit most of you.
- #16 Investment ideas we’ll cover [today/this evening] include: Asset allocation — creating a portfolio mix that’s best for your goals, time frame, risk tolerance and other factors. Risk management — understanding the various risks that come with each type of investment, assessing your tolerance for these risks, and choosing investments that fall within your risk tolerance. Tax management — taking advantage of different tax rules for various retirement and investment accounts, and determining which types of investments will be most tax efficient in which accounts. We’ll talk more about tax management when we discuss our fourth question, “How will I access my money when I need it?”
- #17 The first strategy we’ll talk about is asset allocation. I’ve put it at the top of the list for a reason: Of all the strategies we’ll discuss, it probably will have the biggest influence on your investment results. As you probably know, asset allocation is how you divide your portfolio among stocks, bonds, cash and other types of assets. You’ve likely seen asset allocation models offered by financial media and investment firms for investors at different life stages. Most of these recommendations focus on just three types of assets: stocks, bonds and cash. Keep in mind that an asset allocation strategy does not assure or guarantee better performance and does not eliminate the risk of investment losses. Source: Determinants of Portfolio Performance II — An Update, Brinson, Singer and Beebower, May/June 1991 Financial Analysis Journal.
- #18 Many investors — and especially those with substantial wealth — don’t take full advantage of all the diversification opportunities available within each asset class. For example, if you only have a large-company growth fund, a Treasury bond fund and a money market fund, you can definitely be more diversified. By spreading your assets among more subgroups, you not only expand your investment opportunities, you may actually reduce your portfolio’s overall risk even further. That’s because some subgroups — such as growth and value stocks, large- and small-cap stocks, or Treasury and high-yield bonds — react to events differently and outperform at different times. As you can see, even within the cash asset category, there are a variety of different products that suit different needs. Of course, your allocation and diversification strategies may change to reflect your life stage and risk profile. Note: Each asset class has specific risk characteristics. Talk to your advisor and understand these risks before investing.
- #19 This chart* shows why you want to own different types of investments. Because different asset classes and sub-types react differently to economic, market and political events, no one type leads the market all of the time. A well-diversified asset allocation strategy helps you benefit from investments that are leading the market, while limiting your exposure to those that are lagging. *Source: Zephyr Associates, 2004.
- #20 Managing risk is a key to investment success. And as we’ve just discussed, one way to compensate for various risks is diversification and asset allocation. As you consider various investments, keep in mind that risk comes in many forms, including: Inflation risk — the possibility that your investment’s value will lag inflation. Market risk — the chance that your investment’s price will fall. Default risk — the chance that a bond issuer won’t be able to pay interest due. Interest rate risk — the likelihood that bond prices will fall when interest rates rise. Currency risk — the possibility that your investment will lose value due to fluctuations in foreign currencies.
- #21 Most of you know that it’s important to keep your nest eggs in different asset baskets. But did you know you may also consider diversifying your portfolio from a tax standpoint as well? Just as you don’t know which assets will outperform in the future, you also don’t know how tax rules and rates will change when you’re retired. Diversifying among three types of investment tax treatment — taxable, tax-deferred and tax-free — may help you make the most of today’s and tomorrow’s tax reduction opportunities. Investors can choose to invest before-tax or tax deductible dollars into retirement programs such as qualified pension and profit sharing plans, traditional 401(k)s, and IRAs. These before-tax dollars invested today, plus any earnings, grow tax-deferred and provide taxable income. Withdrawals before 59 ½ may be subject to 10% penalty (in some cases withdrawals may be made without penalty at age 55). Investors can choose to use after-tax dollars to fund products such as Roth 401(k)s, Roth IRAs, tax-exempt bonds and mutual funds, and cash value life insurance. When necessary requirements are met, these items can produce non-taxable income. Income from some municipal bonds is subject to the alternative minimum tax. Depending on your state's law, municipal bond income may be subject to state and local income tax. Income from municipal bonds and municipal bond funds may also be included in the income calculation for determining taxation of Social Security benefits. Investors can choose to invest after-tax dollars that will provide taxable income. This includes investments such as certificates and mutual funds. Interest income is taxed at ordinary income rates. Dividends may qualify for lower tax rates at a maximum rate of 15% (through 2010) based on specific requirements in the 2003 Job Growth and Tax Relief Reconciliation Act. Capital gains, if any, are taxed when realized and if the investment was held for more than one year any gains may also be taxed at a favorable rate. Investments such as annuities and Series EE US Savings Bonds are also made with after-tax dollars, but providethe added benefit of tax-deferred growth. Assets fully in this category can also benefit an investor’s asset accumulation. Growth will be fully taxable as ordinary income upon withdrawal. Earnings on withdrawals from annuities prior to 59 ½ may be subject to a 10% penalty. Along with income tax diversification it is important to consider the time frame for the investments, your risk tolerance, liquidity needs for invested dollars and any circumstances unique to your situation that would impact the investment choices best suited to meet your needs.
- #22 So where’s the best place to put your investments? While your situation is unique, you may want to consider these general guidelines to help minimize your tax bill: Taxable interest is taxed at higher ordinary income rates. Qualifying dividends taxed at lower rate through 2010. Long-term capital gains generally taxed at lower rates. Work with financial and tax advisors to create best strategies for your situation.
- #23 As you diversify your portfolio from a tax standpoint, keep a balance. If your goal is retirement savings, try to maximize your contributions to a qualified retirement plan through your employer, such as a traditional 401(k) or 403(b) plan, or a Roth 401(k) or 403(b) plan. Traditional 401(k) or 403(b) accounts not only provide tax deferral, but they also allow you to contribute pre-tax dollars, so more of your money goes to work immediately. Roth 401(k) and 403(b) can provide tax-free earnings on after-tax contributions. After you have maximized your retirement plan contributions, consider other tax-deferral opportunities, such as traditional or Roth IRAs. Earnings in a traditional IRA grow tax-deferred. Earnings in a Roth IRA grow tax-deferred and can be withdrawn tax-free after age 59 ½, if you have owned the account for over five years. Unlike traditional IRAs, Roth IRAs are not subject to required minimum distributions (RMDs) after age 70 ½. A variable annuity is another tax deferral opportunity to consider once you’ve maximized your employer retirement plan contributions. Earnings grow tax-deferred, and like Roth IRAs there are no mandatory withdrawal rules later in life. Both variable annuities and Roth IRAs have special distribution rules at death. Finally, it’s important not to lock up all your assets in tax-deferred accounts. For example, you should maintain some assets outside of tax-deferred vehicles for short-term needs or mid-range goals. That way, you’ll have resources to tap prior to retirement age, and you won’t trigger early withdrawal penalties that you may incur with tax-deferred accounts.
- #24 I have found the Roth conversion technique to be one of the most exciting wealth creation and wealth preservation strategies available for retirement planning. And with the passage of the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA), converting to a Roth is now possible for higher income individuals. TIPRA eliminated the income limitation on Roth conversions, so starting in 2010 you can convert your traditional IRA to a Roth IRA even if your annual adjusted gross income is above $100,000. Of course a Roth conversion will involve paying income tax on the savings you convert from a pre-tax IRA. But if you make a Roth conversion in the year 2010, you may stretch your tax liability for the conversion out over the next two years, which would be your 2011 and 2012 income tax filings. As I have mentioned, there are lots of advantages to Roth IRAs, including You pay no tax on earnings You may be able to take tax-free withdrawals for qualified educational expenses or other qualified expenses Roth IRAs are not subject to RMDs If you leave a Roth IRA to an heir, they may be able to take distributions from the account over time. This can significantly affect your heir’s income tax liability on the account. Roth conversions are not as advantageous when Taxes are paid from the assets being converted (i.e. A taxable distribution is taken from the retirement account to pay the taxes) Conversions push one into a higher marginal tax bracket Converted dollars are left to heirs who are in a much lower tax bracket than the Roth IRA owner at the time of the conversion (i.e. Owner is in 36% marginal tax bracket but children are in 15% marginal tax bracket)
- #25 Any discussion of retirement investing should cover one of the biggest threats to your wealth in your later years. It’s the potential cost of long-term care, which could substantially drain your assets. According to the United Seniors Health Council in Washington, D.C., at least 6.4 million people aged 65 and older need long-term care, with one in two over age 85 requiring care.* Look around the room. Which of us will need such care? Since we don’t know, the best way to handle this risk is to plan for it prudently. You can: 1. Live with the risk and do nothing. 2. Self-insure. 3. Transfer the risk to an insurance company by researching long-term care policies. The point is to do your research and make a decision. Notice I did not say buy a long term care policy, but rather research the cost versus the benefits and make a thoughtful decision. * Planning for Long-Term Care, United Seniors Health Council, Washington, DC — McGraw Hill, NY 2002.
- #26 Now that we’ve covered some key investing considerations, it’s time to talk about something that’s even more fun: accessing your money for the retirement lifestyle you’ve planned for. So let’s answer the question, “How will you access your money when you need it?” We’ll want to consider ways of tapping your assets that help you: Assure the steady stream of income you need, Keep your investments working effectively over a long retirement, and Work with your tax advisor to determine the best strategy for withdrawals from a tax perspective.
- #27 As you plan to retire, you will need to make decisions that could affect the rest of your life. Some of those decisions are revocable — they can be changed. Some of those are irrevocable — they can’t be changed. Some of those are postpone-able — you can make them later. My suggestion is to focus your time and energy on the irrevocable decisions — if you make a bad irrevocable decision, you must live with the consequences. You have a few irrevocable decisions. One of them may be choosing between taking a pension or a lump sum when you retire. If you take a lump sum, invest poorly and lose 40% of your assets, you can’t go back and tell your company you’d like that pension now instead. That is an irrevocable choice. Conversely, if you take a single-life-only pension and later find out you have a terminal illness, you can’t go back and get the lump sum; it is also an irrevocable choice. Most of you also have a 401(k) or other employer-sponsored retirement savings plans. The IRS allows you to postpone your decisions on these plans. For traditional 401(k)s, you can leave your 401(k) balance in the plan until the April 1st after you turn age 70 1/2, or until you retire from the employer maintaining the plan, whichever comes later. Not all plans have the same rules, so we would need to review your plan documents. But in most cases you can leave assets at the company. In fact, it may be wise to postpone the decision until you have a comprehensive financial plan.
- #28 Let’s review a few qualified plan distribution options: The first thing you can do is nothing. You may leave your money in the plan until the April 1st after you reach age 70 1/2, when you are required to begin receiving required minimum distributions (RMDs). These RMD rules also apply to IRAs and most other tax-qualified plans. In the case that you still work for the employer who maintains the plan, you can leave the money in the plan until you retire, or until April 1st after the year you turn 70 1/2, whichever is later. The IRS allows you to withdraw money from a qualified plan as long as you do not take it out early. Early to the IRS means prior to the year in which you turn 59 1/2. If you take the money out priorto 59 1/2, there could be a 10% penalty in addition to the potential federal and state income tax liabilities. However there are a few exceptions. One is the age-55 exception: If you are age 55 or older when you retire, or if you separate from service from the employer maintaining the plan, the regulations allow you to take random distributions and pay taxes, but avoid the 10% penalty as long as you leave money in the corporate plan. Many of you may do part-time work or consult, but you don’t know what your income will be after retirement. Some of you are not sure what your actual retirement expenses will be. Leaving assets in the plan adds flexibility to your retirement planning. If you have assets in an IRA or transfer from your corporate plan to an IRA, there are exceptions that apply (e.g. hardship withdrawals), and techniques that allow you to withdraw money from these qualified plans prior to age 59 1/2 and avoid the 10% penalty. These are listed in Internal Revenue Code section 72(t). One exception to avoid the 10% penalty is you must have a plan for withdrawing “substantially equal periodic payments” from your plan for five years or until you reach age 59 1/2 , whichever comes later. For that time between age 55 and 59 1/2, it seems logical to build in as much flexibility as possible. You can always transfer to an IRA at a later date if you determine that the 59 1/2 issue is not important to you. Caution: Given today’s life expectancies, one must be very careful that assets are sufficient to generate inflation adjusted income throughout their entire retirement should they choose to retire early.
- #29 Starting in January, 2006 employers began to offer a new kind of 401(k) and 403(b) — the Roth 401(k) and Roth 403(b). This plan may offer advantages to those who think that their tax bracket in retirement may be higher than it is while they contribute to the plan. This may include high income earners who save aggressively, or it may include young people who are in a low tax bracket today but expect much higher earnings in the future. For the Roth 401(k) or Roth 403(b) plan, you contribute after-tax dollars. There are no income limits, so anyone whose employer offers this type of plan may contribute. The 401(k) and 403(b) contribution limit, which is $15,500 in 2008 (with a “catch-up” provision of $5,000 for those over 50), applies to these plans. This means that your contributions to all of your 401(k) plans can total this limit. So if you contributed $7,750 pre-tax to your traditional 401(k) or 403(b) in 2008, and then your employer added the Roth 401(k) or 403(b) option, you would be allowed to contribute $7,750 in after-tax dollars to the Roth 401(k) or 403(b) for the 2008 year. A financial advisor can help you determine whether a traditional or Roth 401(k) or 403(b) plan would be best for your situation. Roth 401(k) and Roth 403(b) distributions are tax-free, and can be accessed any time after you are 59 1/2 and you have owned the account for five years. Although Roth 401(k)s and Roth 403(b)s are generally subject to required minimum distributions (RMDs) after you turn 70 ½ unless you are still employed, if you roll your Roth 401(k) and Roth 403(b) over to a Roth IRA you will not be required to take any distributions at any time. So the Roth IRA money can be preserved in the account, with the opportunity to grow tax-free. This is especially important if you plan to pass on some of your wealth to your heirs. And as I mentioned previously, the heirs to an IRA may choose to receive distributions over their lifetime, which may yield significant income tax advantages for them.
- #30 If you’d like more certainty about how much you can withdraw from your nest egg, you might want to create a steady stream of income. This strategy can be especially helpful if you don’t have a traditional company pension. Here’s how it works: Use a portion of your assets to buy an immediate annuity, also known as a single premiumimmediate annuity (SPIA). In exchange for your payment, the annuity company will pay you a specified guaranteed monthly income for life or a defined period. Once the payments start,however, you cannot get your lump sum back — it’s an irrevocable decision. Immediate annuities purchased with after-tax funds receive favorable tax treatment. Generally each payment will include principal and earnings.You pay tax on the earnings only as they are distributed to you. With a certain level of income guaranteed, you may be comfortable investing the remainder of your portfolio more aggressively, which may boost your long-term returns — and the amount youcan eventually withdraw or pass to your heirs. Note: *Annuities are only one of many retirement strategies available. Talk to your financial advisor to find out whether an annuity fits your individual needs or situation. Most annuities have a tax-deferred feature. So do many retirement plans under the Internal Revenue Code. As a result, when you use an annuity to fund a retirement plan that is tax-deferred, your annuity will not provide any necessary or additional tax deferral for that retirement plan. But annuities do have features other than tax deferral that may help you reach your retirement goals. You should consult a tax advisor prior to making a purchase for an explanation of the tax implications to you.
- #31 Our fifth question is, “What do you want to leave behind?” While we do not have enough time to adequately cover all the important points of estate planning [today/this evening], it is a significant access issue for most of you. For many of our clients it iseven more important than their own financial independence. The first step in estate planning is to understand what your estate is.
- #32 I’ll give you a very sophisticated definition of your estate. It’s all your stuff — your cars, equity in your home as well as investments and other personal property. What many people do not understand is that life insurance death proceeds may be included in your taxable estate, depending on ownership. For example, if you own a $500,000 life insurance policy, the death settlement will be included in your estate and may be subject to estate taxes. One of the techniques we can consider is to remove the insurance proceeds from the taxable estate through different ownership arrangements such as having an irrevocable trust own the policy.
- #33 Estate taxes, income tax on retirement plan or annuity income, and probate expenses—these are all expenses that may reduce the amount of assets that pass on to your heirs. While many people understand the impact of taxes, they may not realize the negatives of having assets go through probate: 1.There are costs such as court costs, which vary state by state and in some cases exceed 7% of theestate value. In your state the average probate fees are ____%. 2.Privacy issues. All assets that go through probate are public record. If you want to know howmuch your aunt really had, you could spend an exciting day at the courthouse going throughprobate records. Many people try to avoid probate of their assets because they do not want theiraffairs to be public. 3.The third negative of probate is there are delays — some significant — in allowing your heirs toaccess the estate assets. All assets that pass to your heirs by will go through probate. Your will, in effect, is your letter of instruction to the probate court informing them of your intentions. If you designate a beneficiary of a life insurance policy or a retirement plan as “my estate,” these assets will be directed to probate and be exposed to the three negatives.
- #34 When you or I die with assets in a qualified retirement plan, somebody is going to pay the taxes. By spending some time planning your estate, however, you may be able to decrease the amount of taxes your heirs need to pay. Here is a story about an executive, age 67, who had $2,000,000 in IRA assets. His wife died three years earlier. He also had other assets such as his home, etc., and had a total net worth in excess of $4 million when he died. This executive’s goal was to preserve the IRA for his two children and let it grow tax deferred. Unfortunately, he didn’t do proper wealth preservation planning and listed his estate as the beneficiary of his $2 million IRA. Because he did not specifically designate his children as beneficiary on the IRA beneficiary forms, his children have to distribute all the IRA assets by the time five years have passed. The large distributions, even if spread out for the five years, will bump the children into a higher income tax rate. If this executive had named his children on the IRA beneficiary forms, his children would have had the opportunity to take distributions over their lives, allowing them to continue to defer income taxes. Depending on the distribution amounts each child takes, the children may not be bumped into a higher tax rate. Moreover, if the children distribute only the minimum required by the IRS each year, the IRA has the potential to keep growing, perhaps allowing each child to leave a portion of the IRA to their children. Of course, large inheritances may be subject to other types of taxes such as estate tax. But proper beneficiary planning with IRAs can help avoid this kind of income tax problem for your heirs. This is a great example of how important it is to ensure you have thought through the beneficiary designations on your IRAs. This executive built a nice nest egg in his IRA in the accumulation phase, but unfortunately didn’t plan for the inheritance phase.
- #35 So now, ask yourself: What do I want to retire to?Do I have the plan to get me there successfully?Can I use any help? Whether you decide to travel, volunteer, return to school or, yes, play chess in the park with your buddies, my hope is that you’ll take the time to imagine your dream retirement. And then, with thoughtful planning, I hope that you are able to make it happen. So where do you go from here? Well, at the beginning of the seminar I mentioned that I would give you an opportunity to meet with me to share information and find out how we might work together to help you achieve your dreams and goals. I hope you got a lot of good ideas out of this seminar. I can’t emphasize enough, however, that a solution that might be good for your neighbor or your friend might not be the best one for you. Effective financial planning must be based on your personal financial situation. As an Ameriprise financial advisor, I’ve structured specific solutions for many, many clients, including those who are close to retirement. I can help cut through all the jargon and complex formulas to find solutions that make sense for you. I look forward to helping you achieve your personal financial goals. If you believe that we might be able to work together to develop a plan to help you reach the retirement you want, please check yes on the comment card. If you do check yes, let me tell you what will happen: [PERSON WHO WILL ACTUALLY CALL] will call you to set up an appointment. At the appointment, which should last about [TIMEFRAME], we will review your specific financial situation and goals. We will also review my advisory process and how I work with clients. Because this is only an initial consultation, I will not be able to provide written analysis or recommendations relating to your financial goals and financial planning advice needs. This meeting is simply an opportunity for you to share your goals and concerns with a financial professional. If together we see a need for financial planning, then we can take steps to make that happen. Sound okay? Good.
- #36 Thank you for your time [today/this evening]. I hope each and every one of you can approach retirement with optimism and confidence. And most important, that you’re able to live your dream retirement without unnecessary financial worries. If I can be of assistance as you plan for, or rethink, your retirement, please let me know.