8 Key Risks of Retirement Planning

ADDRESSING R.I.S.K.  BUILDING YOUR RETIREMENT INCOME SURVIVAL KIT

RETHINKING INCOME
SIMPLIFYING COMPLEXITY
Copyright © 2011 ValMark Securities Inc. All Rights Reserved.

TABLE OF CONTENTS

• Risk Defined

• Traditional Planning

• Key Risks of Retirement

• Building Your R.I.S.K™


RISK DEFINED


Risk: the potential to experience injury or loss


RISK DEFINED

PERSONAL PENSIONS ARE DISAPPEARING:

 “PBGC takes control of underfunded pension of Toyota and GM.
Pension plan was only 55% funded with $161 million in assets and
$292 million in liabilities” -Wall Street Journal (March 3, 2010)

 “California's public pension funds are underfunded
by as much as $500 billion, according to a Stanford
University study that was commissioned by Gov.
Arnold Schwarzenegger and released Monday.”
-CBS (April 5, 2010)

 “The future ain’t what it used to be!” - Yogi Berra


RISK DEFINED

PERSONAL PENSIONS ARE DISAPPEARING:


RISK DEFINED

NUMBER OF U.S. RETIREES PER 100 WORKERS:

Year Number
1950 6
1970 27
1990 30
2010 (est.) 32
2030 (est.) 46
Data Source: Social Security Administration, “The 2007 Annual Report of the Board of Trustees of
the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds,” p.48.


RISK DEFINED Conclusion

 Guaranteed income streams for life are no
longer handed to us at retirement.

 Planning for financial security in retirement
is a burden now falling directly on our own
shoulders.

 How can we effectively prepare and plan for
retirement?


TRADITIONAL PLANNING


T R A D I T I O N A L T H O U G H T – A S S E T A L L O C AT I O N

Large Cap
Mid Cap
Small Cap
Bonds
International

ACCUMULATION PHASE: ASSET ALLOCATION



WHAT IS THE ULTIMATE GOAL?



To Reach the Top? To Reach the Top…

or

…and Return Safely

80% of climbing accidents occur on the descent!


The same is true for retirement planning

The goal of saving for retirement is not merely
to accumulate assets (“climbing to the top”)

…but to use these saved assets to create lifelong
income enabling us to live the kind of life we
desire to throughout retirement (“making it
back down safely”)


THE GREAT TRANSITION

“It’s time to take my savings and
turn it into income that I can
rely on for the rest of my life.“


The risks we face saving for retirement are different
than the risks we face during retirement.


TRADITIONAL PLANNING Conclusion

 Traditional retirement planning focuses mostly on
asset allocation and saving for retirement.

 The ultimate goal of retirement planning is to
transition savings into life-long, sustainable income
streams to satisfy our Needs and Wants throughout
retirement.

 In order to be successful, we must proactively reassess
the assets we have saved for retirement and redeploy
them in a way that will address the Key Risks of
Retirement (i.e. come back down the mountain safely).


KEY RISKS OF RETIREMENT



Retirement survival requires the following risks
to be addressed:
 Market  Inflation
 Sequence of Return  Liquidity
 Longevity  Taxation
 Health  Legacy



Percent of consumers very or extremely anxious over specific retirement risks:

Social security benefits 41%

Interest rates 49%

Longevity 49%

Lack of guaranteed income 49%

Market risk 53%

Health expenses 56%

Inflation/tax increases 61%

Source: McKinsey & Company 2007 Consumer Retirement Survey


MARKET RISK


MARKET RISK
35 Years
2009: +26.5%
2003: +28.7%
58 positive years: Average 1999: +21.0%
positive return 21.45% 1998: +28.6%
1997: +33.4%
1996: +23.1%
1995: +37.4%
Positive versus negative average annual 1991: +30.6%
1989: +31.5%

returns for the S&P 500 Index: 1929-2010 1986: +18.5%
1985: +32.2%
1983: +22.5%
1982: +21.4%
1980: +32.4%
1979: +18.4%
1976: +23.8%
1975: +37.2%
1972: +19.0%
1967: +24.0%
1963: +22.8%
1961: +26.9%
1958: +43.4%
1955: +31.6%
1954: +52.6%
Average Annual Return: 11.2% 1952: +18.4%
1951: +24.0%
1950: +31.7%
8 Years 1949: +18.8%
2007: +5.5% 7 Years 7 Years 1945: +36.4%
24 negative years: Average 2005: +4.9% 2004: +10.9% 2010: +15.1% 1944: +19.8%
negative return -13.61% 1994: +1.3% 1993: +10.0% 2006: +15.8% 1943: +26.0%
1987: +5.2% 1992: +7.7% 1988: +16.8% 1942: +20.3%
Down Down Down 1970: +4.0% 1984: +6.3% 1971: +14.3% 1938: +31.1%
Down
18%+ 12%-18% 6%-12% 1960: +0.5% 1978: +6.6% 1965: +12.5% 1936: +33.9%
0%-6%
1948: +5.5% 1968: +11.1% 1964: +16.5% 1935: +47.7%
1947: +5.7% 1956: +6.6% 1959: +12.0% 1933: +54.0%
2008: -36.9% 1973: -14.7% 2001: -11.9% 1990: -3.2% Up UP Up Up
2002: -22.1% 1 Year 2000: -9.1% 1981: -4.9% 0%-6% 6%-12% 12%-18% 18%+
1974: -26.5% 1977: -7.2% 1953: -1.0%
1937: -35.0% 1969: -8.5% 1939: -0.4% Sources: Thomson Investment View and Standard & Poor’s (S&P), a division of The
1931: -43.3% 1966: -10.1% 1934: -1.4% McGraw-Hill Companies, Inc. Each calendar year listed in chart reflects average annual
1930: -24.9% 1962: -8.7% 5 Years performance from 12/31 of prior year to 12/31 of listed year.
6 Years 1957: -10.8%
1946: -8.1% The Standard & Poor’s (S&P) 500 Index is an unmanaged index that tracks the
1941: -11.6% performance of 500 widely held, large-capitalization U.S. stocks. Indices are not managed
1940: -9.8% and do not incur fees or expenses. It is not possible to invest directly in an index. Past
1932: -8.2% performance is not a guarantee or indication of future results. Individual results may vary
1929: -8.4%
12 Years Copyright © 2011 ValMark Securities Inc. All Rights Reserved.

MARKET RISK

Equities – The Necessary Evil
 Equity exposure is typically needed to reach certain
retirement objectives.

 Equities have historically been relied upon to be a
powerful growth vehicle and inflation hedge.

 However, Market Risk, if not addressed, could wipe
out your entire portfolio before or during retirement.


SEQUENCE OF RETURN RISK



 It is not important when buying and holding
(average returns work just fine for accumulation).

 Once you start withdrawing money in retirement
(distribution), average returns are irrelevant.

 Example: “If the market averaged 7% annually, I
can safely assume that a 5% withdrawal rate is
sustainable throughout retirement.”


SEQUENCE OF RETURNS RISK

$1.2M
Hypothetical
zero balance: age 97
Retirement age $1M
60 years old

Investment
$1,000,000 $0.8
Distributions 1) 7%
$50,000 every year,
$0.6
increased annually for
3.5% inflation

$0.4 7%
This is a hypothetical
example and is not 3) 7% 2) 7%
intended to project the
performance of any $0.2
specific investment.

$0
60 70 80 90 100
age


$1.2M
Hypothetical
Retirement age $1M
60 years old

Investment
$1,000,000 $0.8

Distributions zero balance: age 91
$50,000 every year,
$0.6
3.5% inflation 1) 7%
$0.4
example and is not
intended to project the 7%
specific investment. 3) -13% 2) 27%

$0
60 70 80 90 100
age


$1.2M
Hypothetical
Retirement age $1M
60 years old

Investment
$1,000,000 $0.8

Distributions zero balance: age 91
1) 7%
$50,000 every year,
$0.6
3.5% inflation

$0.4 7%
example and is not
intended to project the
3) 27% 2) -13%
specific investment.
$0
60 70 80 90 100
age


 If sequence of return risk is not addressed, then
successful retirement depends on being lucky
enough to retire in the right years.

 A solution must be used that facilitates enough
market/equity exposure necessary to reach asset
accumulation goals, while still allowing for
sustainable withdrawal rates from the portfolio
regardless of return sequence in retirement.


LONGEVITY RISK


LONGEVITY RISK

 Advances in medicine, technology and increased awareness of
healthy living increase life expectancy.

 Life expectancy is the halfway point (50% will live beyond this
number).

 Retirement planning should focus on the probability of survival
(outliving income is a legitimate risk).

 Optimized retirement portfolios typically have a lifetime income
component because predicting death is impossible.

Source: Tools & Techniques, Life Settlement Planning – 2008


SLONGEVITY RISK
EQUENCE OF RETURN RISK
At least one
Age Female Male member of the
couple surviving
70 93.90% 92.20% 99.50%
Probability of 75
80
85%
72.30%
81.30%
65.90%
97.20%
90.60%
Survival at age 65 85
90
55.80%
34.80%
45.50%
23.70%
75.90%
50.30%
95 15.60% 7.70% 22.10%
100 5% 1.40% 6.30%
100.00%
90.00% Female
80.00%
70.00%
60.00% Male

50.00%
40.00%
At least one
30.00% member of the
20.00% couple
surviving
10.00%
0.00%
70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99100
Source: RP2000 Mortality table; IFID Centre calculations

LONGEVITY RISK

• Table compares the
different portfolios 30 – Year Retirement
Stock / Bond Mix
probability of
funding retirements
100/0 80/20 60/40 40/60 20/80
for 30 years.
Initial Withdrawal Amount
3% 94% 97% 98% 99% 99%
• Careful evaluation
of your asset 4% 83% 86% 89% 91% 92%
allocation and
initial withdrawal 5% 67% 69% 68% 63% 49%
Initial Withdrawal Amount

amount in
retirement is vital. 6% 50% 49% 42% 29% 10%

• Each Initial 7% 35% 31% 22% 9% 1%
withdrawal assumes
a 3% inflation rate. 8% 24% 18% 10% 2% 0%

This is a hypothetical example for illustrative purposes only

HEALTH RISK


HEALTH RISK

 Health care costs are growing twice as fast as general inflation.1

 2 out of every 3 people age 65 and older will need some form of long
term care in their lifetime.2

 Health care cost without long term care expenses is the second biggest
expense for retirees, averaging about 20% of the couples total monthly
expenses.3

 About 75 percent of single people and 50 percent of all couples spend all
their savings within one year of entering a nursing home.4

1 Fidelity, Investment News- Health-Care Expenses in Retirement Surge , March 13, 2006 .
2 “Americans Fail to Act on Long-Term Care Protection,” The American Society on Aging, May 2003.
3 Are retirees' health costs as steep as some say? Market Watch, March 25, 2010
4 Long Term Care Insurance Tree ,September 2009.


HEALTH RISK
Nursing home national average: $66,850
Nursing home national range: $44,553 – $189,891

Source: Genworth 2009 Cost of Care Survey


HEALTH RISK

IMPLICATIONS:
 The majority of people 65 and over will need long term care
and the cost of such care is increasing.1

 Protecting against these costs is crucial to retirement security. 2

 It’s all about you – personal facts require custom planning.
1 “Americans Fail to Act on Long-Term Care Protection,” The American Society on Aging, May 2003.
2 Long Term Care Insurance Tree ,September 2009


INFLATION RISK

“Inflation is the one form of taxation that can be
imposed without legislation.” - Milton Friedman, Economist


INFLATION RISK
• “Inflation has superseded health care risk as the top concern of both retirees
and pre-retirees. 58% are very or somewhat concerned and 71%, up from 63%
percent in 2007, express concern that the value of their savings and
investments might not keep pace with inflation.”
-2009 Risks & Process of Retirement Survey Report of Findings Sponsored by
the Society of Actuaries (March, 2010)

• The Elderly Spend Differently:

Transportation : -29.3%

Recreation: -21%

Health Care: 117%

Housing: 23.5%

Food & Beverage: -24.2%

Education: -41.3%

Apparel: -41.3%

-60% -40% -20% 0% 20% 40% 60% 80% 100% 120%
Data Source: Bureau of Labor Statistics data to end of 2006; IFID Centre calculations


LIQUIDITY RISK


LIQUIDITY RISK

 Change is the one constant we can count on.

 Even the best retirement income planning strategy is
vulnerable if flexibility is not incorporated to
address unexpected events.

 Retirement has witnessed many “poor” millionaires.


TAXATION RISK


TAXATION RISK

Sources: taxfoundation.org, 2009 (IRS),
usgovernmentspending.com (U.S. budget data and U.S. Census reports)


TAXATION RISK

 Taxation risk impacts the planning process for
addressing the other key retirement risks

 The decisions we make today “eliminate” or “create”
opportunities for mitigating taxes in the future


LEGACY RISK


LEGACY RISK

 The risk of not being able to leave a financial legacy to
the people or organizations we care about most

 Making a conscious decision to maximize Lifestyle or
Legacy is an important part of planning for retirement

 Once the decision is made, the retirement income
strategy should be crafted with this goal in mind


KEY RETIREMENT RISKS Conclusion

 We are faced with unique risks in retirement
that must each be addressed.

 Designing an overall portfolio comprised of
complimenting income allocations is necessary
to effectively manage these risks.

 What is the best process for building an
optimized retirement portfolio?


BUILDING YOUR R.I.S.K™

“Portfolio optimization is not a single point-in-time solution,
but a process that is executed over time.”
The Challenge of Optimal Retirement Portfolios, Garth A. Bernard (January 2009)


RETIREMENT PLANNING MYTHS

 Myth#1: Effective asset allocation explains 95% of investment
performance in retirement
 As we get closer to retirement, I believe that asset allocation takes on a more limited
role, compared to the much more important and critical decision of suitable product
(income) allocation.” - Moshe Milevsky Ph.D, Schulich School of Business, York University

 Myth#2: The most import thing to focus on in planning for
retirement is accumulating enough assets (i.e. What’s Your Number?)
 The most important thing about retirement is not just accumulating a lump sum of
money, but turning this money into an annual, life-long income streams (i.e. making it
back down the mountain safely)…. “What’s Your Percentage?”

 Myth#3: The risks we face saving for retirement are the same
ones we face during retirement.
 Unique risks will fight against retirement income once we begin the distribution phase



• “Any income allocation strategy that does not export all of the
longevity, LTC, market and inflation risks will likely fail."
– Jim Otar, Unveiling the Retirement Myth

• “I've run thousands of simulations of hypothetical retirements and
ranked what can go wrong. Far and away the biggest causes of failure
are longevity risk, inflation and a sour market early in retirement. No
one kind of investment works against all three. So you need to
diversify among investment products, just as you need to
diversify among stocks and bonds and so on.”
– Moshe Milevsky Ph.D, Schulich School of Business, York University



“Individuals, largely due to a lack of awareness and education about
these more optimal ways to deploy a portion of their retirement
assets, often end up deploying assets less efficiently than possible to
achieve the financial objective of maximizing income while
minimizing the probability of outliving it.”
- Jeffrey K. Dellinger, FSA, MAAA – “Efficient Deployment of Retirement Assets
to Increase Financial Security of Seniors and to Minimize Welfare Burden on
State” September 2007


THE 3 CORE PLANNING PRINCIPLES

TRANSITION FROM ASSET ALLOCATION TO INCOME ALLOCATION
1 Effectively transition your retirement savings accumulation strategies to
distribution strategies.

DETERMINE YOUR WITHDRAWAL PERCENTAGE
2 Determine the percentage of savings you can withdraw as income each year so
it is sustainable throughout retirement.

ADDRESS RISK
3
Ensure that your annual income streams are protected against the key risks you
will face during retirement.


BUILDING YOUR R.I.S.K.™

Transfer Reduce
(Optimize, Mitigate)
(Share or Insure)

Retain Avoid
(Accept and Budget) (Eliminate, Withdraw)


THE R.I.S.K. PROCESS™

 The R.I.S.K. Process™ is a 6 step turn-key
program designed to help you address the
Key Retirement Risks by building your own
custom Retirement Income Survival Kit
(R.I.S.K.)™


THE R.I.S.K. PROCESS™


ADDRESSING R.I.S.K.™ Conclusion

 We are faced with a retirement crises. Lifelong income
streams are no longer handed to us at retirement.

 Traditional planning focuses on asset allocation. This is
great for accumulation. However, distribution planning
requires us to develop proactive income allocation
strategies.

 In order to “Make It Back Down the Mountain Safely,”
these income strategies must work together to address
Key Retirement Risks.

 It is helpful to use a process to make this great transition.
The process should incorporate complimenting income
distribution strategies built upon sustainable withdrawal
rates that work together to address Key Retirement Risks.


“Despite high levels of concern over retirement,
new actuarial study sees little change among
Americans in planning for the future.”
2009 Risks & Process of Retirement Survey Report of Findings
Sponsored by the Society of Actuaries (March, 2010)


Are you going to offer to help build them a
Retirement Income Survival Kit
(R.I.S.K.)™?

email: risk@valmarksecurities.com


8 Key Risks of Retirement Planning

8 Key Risks of Retirement Planning

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