Spending in retirement may be different than the default assumption

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2 Today s agenda Retirement reality: debunking common myths Planning for health care costs in retirement Spending in retirement may be different than the default assumption Summary 2

3 The retirement equation 5 Retirement landscape A sound retirement plan: Make the most of the things that you can control but be sure to evaluate factors that are somewhat or completely out of your control. Source: The Importance of Being Earnest, J.P. Morgan Asset Management,

4 Life expectancy probabilities 6 Retirement landscape If you re 65 today, the probability of living to a specific age Count on longevity: Life expectancy tells only half the story. Plan on the probability of living much longer, perhaps 30 plus years in retirement. For example, there is a 47% chance that one spouse will live to age 90, 2% higher than last year. Source: Social Security Administration and J.P. Morgan Asset Management. 4

5 Managing expectations of ability to work 8 Retirement landscape Current expectations of retirement vs. actual experience of retirees Reasons cited for retiring earlier than planned Early retirement: While more Americans are working past age 65, not everyone will be able to control their retirement timing. Source: Employee Benefit Research Institute and Mathew Greenwald and Associates, Inc., 2013 Retirement Confidence Survey. 5

6 Social Security timing tradeoffs 9 Retirement landscape Born ; Age Born 1960+; Age 54 or younger Understand the tradeoffs: Deciding when to claim benefits will have a permanent impact on the benefit you receive. Claiming before full retirement age can significantly reduce your benefit while delaying increases it. For illustrative purposes only. For , two months are added to the Full Retirement Age each year. Source: Social Security Administration, J.P. Morgan Asset Management. 6

7 Today s agenda Retirement reality: debunking common myths Planning for health care costs in retirement Spending in retirement may be different than the default assumption Summary 7

8 What is Medicare? Inpatient hospital Traditional Medicare Part A Fully Government provided Medicare Advantage (Part C) Alternative to Traditional Medicare Part A Doctors and tests Part B Part B Prescription drugs Government provided + premium Part D Sold by private companies with a government subsidy Combines Part A and B May provide additional benefits Most plans cover prescription drugs Sold by private companies with a government subsidy 8 Medicare Supplement Insurance Co-pays & deductibles related to Parts A and B Standardized plans Sold by private companies

9 Rising annual health care costs 25 Estimated annual out-of-pocket health care costs for a 65-year-old retiring in 2014 Spending A growing concern: Lifetime retirement health care cost estimates may be overwhelming, therefore annual health care costs may be easier to digest when planning for retirement expenses. For illustrative purposes only. Source: Employee Benefit Research Institute (EBRI), January 17, Based on national average cost estimates for Medicare Parts A, B, D and Medigap Plan F. EBRI derived inflation estimates from US CBO estimates. On average, health care costs are estimated to increase 5.0% for the 50th percentile, 4.8% for the 75th percentile and 3.5% for the 90th percentile. Vision, dental and long-term care expenses are not included. Assumes continued implementation of the Patient Protection and Affordable Care Act. The costs at 90th percentile actually dip down in 2019 due to the implementation of the Medicare prescription drug donut hole being filled in as applied to Medicare prescription drug costs. 9

10 Medicare Advantage: out of pocket spending limits Distribution of Medicare Advantage plans out-of-pocket spending limits $2500 or less $ $3400 $ $5000 $ $ % 41% 27% 90% 23% 44% 34% 10 Does not include spending on prescription drugs 4% 3% Average out-of-pocket limit, weighted by enrollment 2014: $4,900 Note: Excludes SNPs, employer-sponsored (i.e., group) plans, demonstrations, HCPPs, PACE plans, MSAs, and plans for special populations (e.g., Mennonites). Percentages are unweighted by enrollment. All Medicare Advantage plans have been required to limit out-of-pocket expenses to no more than $6,700 since PFFS plans not shown because 98% of PFFS plans were missing limits. The total includes cost plans, which are not shown separately. Data may not add to 100% due to rounding. Source: Medicare Advantage 2014 Spotlight: Plan Availability and Premiums, Kaiser Family Foundation, Nov 25, 2013

11 Health care spending growth has been on a recent decline Year-over-year health care inflation change 14.00% 12.00% 10.00% 8.00% 6.00% 5.7% Average ( ) 4.00% 2.00% 2.01% 0.00% Source: BLS

12 As Boomers age, per person costs are likely to increase Relative per capita health spending, by age cohort Age = 1 (baseline) 6 5.7x 5 Spending relative to age x 0.5x 0.6x 1.0x 1.0x 1.4x 2.0x 3.1x Age cohorts of Americans 12 Source: Meara, White and Cutler, Trends in Health Spending by Age. Represents combination of household surveys and total spending data to analyze trends in medical spending from

13 Where are we headed? New technology: innovation Lack of cost sharing Aging population Chronic disease Dual Medicare/Medicaid eligibility Poor care coordination Poor health behaviors Good economic conditions Provider price increases New technology: efficiencies Good health behaviors Greater care efficiency & coordination Increased cost sharing Poor economic conditions Drugs going off patent 13 Source: Containing the Growth of Spending in the U.S. Health System, Health Policy Center, Urban Institute, October Health care spending and the Medicare Program, Medicare Payment Advisory Commission, June 2013 Databook. Center for Medicare and Medicaid Services, Medicare and Medicaid Research Review, 2013, Vol 3, No 3. Kaiser Family Foundation, Medicare s Role for Dual Beneficiaries, April J.P. Morgan Asset Management analysis.

14 Long-term care planning 27 Likelihood of needing long-term care 2012 new LTC claims by type Spending All LTC claims by type Long-term vision: Many individuals will need long-term care. There may be a progression of care that starts with home care. Source : American Association for Long-Term Care Insurance 2014 Sourcebook. Lifetime chance of using benefits from a LTC policy purchased at age 60 with a 90-day waiting period before benefits start is 35%. There is approximately a 1 in 3 chance of filing a claim that will last less than 6 months; however, there is a 1 in 10 chance of filing a claim for 5 years or more. Annualized inflation : 3.81% nursing home care; 1.67% home health care. 14

15 Annual cost of nursing home care (private room) 28 Spending The cost of care: Many people realize nursing home care is expensive, but there is significant cost variation depending on where care is utilized. Source: New York Life Insurance 2014 Cost of Care Survey developed in partnership with Univita. Average daily costs annualized over 365 days and weighted by city population for each state. 15

16 Today s agenda Retirement reality: debunking common myths Planning for health care costs in retirement Spending in retirement may be different than the default assumption Summary 16

17 0514 The Prosperous Retirement theoretical spending profile Percent of pre-retirement spending 100% 90% 80% 20%-30% Reduction in Spending? Healthcare / LTC 70% 60% 50% Active Phase Go-Go Passive Phase Slow-Go Final Phase No-Go 40% 30% 20% 10% 0% Source: The Prosperous Retirement: Guide to the New Reality, Michael K. Stein, CFP, pp

18 Changes in spending 23 Average household spending patterns by various age groups Spending What to expect: Household spending peaks at the age of 45, after which spending declines in all categories but health care. Estimates based on average consumer expenditure from the Consumer Expenditure Survey for each age group excluding pension contributions, BLS. Data as of September Average household size for age is 2.7; age is 2.1; age is 1.8 and age 75+ is 1.5. Source: J.P. Morgan Asset Management. 18

19 0514 Changes in spending by age and household size Average spending patterns by household size $70,000 $60, persons $50,000 $40,000 $30, persons 1.8 persons 1.5 persons The empty nest: A decline in the average household size plays a role in spending changes over time $20,000 $10,000 $ Age One person HH size Average HH size Two person HH size Estimates based on average consumer expenditure from the Consumer Expenditure Survey for each age group excluding pension contributions, BLS. Data as of September Average household size for age is 2.7; age is 2.1; age is 1.8 and age 75+ is 1.5. Source: J.P. Morgan Asset Management.

20 Average spending patterns over seven 20-year rolling cohorts ( ) of the Silent Generation adjusted for inflation to 2012 dollars $60,000 $56,805 $50,000 $45,320 20% 29% $40,000 $40,406 $30,000 $20,000 $10,000 $ Age Health care Housing Education Food & Beverage Transportation Other Entertainment Apparel and services Estimates based on average consumer expenditure from the Consumer Expenditure Survey for each age group excluding pension and cash contributions, and including mortgage principal pay down in the housing category, BLS Data as of September Source: J.P. Morgan Asset Management

21 An affluent view: $2-5M in investable wealth Average spending patterns of various age and asset groups - Chase data $2MM - $5MM in assets $160,000 $140,000 $137,047 $140,173 $128,271 $120,000 $113,404 $100,000 $80,000 $101,592 $91,411 $86,481 $79,390 $76,063 $60,000 $40,000 $20,000 $ Age Health care Housing Education Food & Beverage Transportation Other Entertainment Apparel and services Travel 21 Based on Chase credit card, debit, and DDA mortgage payments from 9/2012 8/2013 Source: J.P. Morgan Chase

22 0514 Traditional vs. historical spending assumptions "Traditional" spending assumption vs. historical reality $80,000 $79,891 $70,000 $60,000 $50,000 $43,092 $49,366 $40,000 $30,000 $20,000 $10,000 $ Age Health care Housing Education Food & Beverage Transportation Other Entertainment Apparel and services Inflate by 2.5% Estimates based on Consumer Expenditure Survey results from Source: J.P. Morgan Asset Management

23 Today s agenda Retirement reality: debunking common myths Planning for health care costs in retirement Spending in retirement may be different than the default assumption Summary 23

24 The retirement equation 5 Retirement landscape A sound retirement plan: Make the most of the things that you can control but be sure to evaluate factors that are somewhat or completely out of your control. Source: The Importance of Being Earnest, J.P. Morgan Asset Management,

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26 Will the Affordable Care Act encourage early retirement? No pre-existing conditions limitations Insurance is available with no increased cost for those with medical conditions Subsidies for those with lower incomes Example: 55 year old couple with MAGI of $60,000 may receive a $5,607 subsidy 1 Younger individuals subsidize older individuals Premiums can t be more than 3X higher for older people than for younger people Example case: 64 year old non-smoker Average premium for a silver plan: $7,606 Maximum out-of-pocket costs: $6,350 Vs. 65 year old on Medicare Average total cost: $4, th percentile prescription drug cost: $7, Source: Kaiser Family Foundation focus on health reform summary of the Affordable Care Act, last modified April 23, MAGI = Modified Adjusted Gross Income. Kaiser Family Foundation subsidy calculator US average for non-smokers in 2014 with no employer coverage for a Silver Plan subsidies would be different for a Bronze plan (less coverage) for a Gold plan (more coverage). Subsidies start at 400% of the Federal poverty level ($62,920 for a 2 person household) in the 48 contiguous states and the District of Columbia.

27 J.P. Morgan Asset Management index definitions 27

28 28 J.P. Morgan Asset Management disclosures