2016 MDRT Annual Meeting e-handout Material. 4th Generation Retirement Planning. 3:30 5:00 p.m.

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1 2016 MDRT Annual Meeting e-handout Material Title: Speaker: 4th Generation Retirement Planning Guy E. Baker, MSFS, CLU Presentation Date: Tuesday, June 14, 2016 Presentation Time: 10:00-11:30 a.m. AND 3:30 5:00 p.m. The Million Dollar Round Table (MDRT) does not guarantee the accuracy of tax and legal matters and is not liable for errors and omissions. You are urged to check with tax and legal professionals in your state, province or country. MDRT also suggests you consult local insurance and security regulations and your company s compliance department pertaining to the use of any new sales materials with your clients. The information contained in this handout is unedited; errors, omissions and misspellings may exist. Content may be altered during the delivery of this presentation Million Dollar Round Table Million Dollar Round Table 325 West Touhy Ave. Park Ridge, IL USA

2 Slide 1 Guy E. Baker, MSFS, CLU 4th Generation Retirement Planning Slide 2 1. What is your NUMBER? 2. How much do I have to save? 3. How do I invest with the HIGHEST Probability of Success? 3 KEY QUESTIONS Everyone needs to ANSWER these questions either directly or indirectly Slide 3 The Key Issues And Concerns about Retirement Market Uncertainty Inflation Longevity Sustainability Consistent Income Financial Flexibility

3 Slide 4 Ups and Downs of Investing Slide 5 Rational Logical Cognitive Normative Fast and vs. Slow Behavioral Investors Have Two Brains Emotional Irrational Feelings Slide 6 Diversification Efficient Frontier Institutional Low Fees Anchoring Representativeness Risk Aversion Pessimism Loss Aversion Research MEETS Behavior

4 Slide 7 What It Takes To Successfully Invest "To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information. What's needed is: 1. A sound intellectual framework for making decisions and 2. The ability to keep emotions from corroding that framework. Warren Buffett Slide 8 Topics to Cover 1. Think About Retirement 2. How the Old Model has Changed 3. Look at the factors undergirding the change 4. Things we can do about it. Slide 9 Human Capital is a depleting Asset Our Human Net Worth CONVERTS Earnings to Investments and Savings

5 Slide 10 Thinking About Retirement Human Capital Investment Capital Retirement Slide 11 Wealth Management Earnings Life Cycle Retirement Life Cycle Accumulation Decumulation Safe Savings Rate Safe Withdrawal Rate SSR SWR Slide 12 What Does Safe Mean?

6 Slide 13 Safe Savings Rate The amount you need to save to be assured you will reach your Number. Safe Withdrawal Rate The amount you can withdraw and feel confident you will not run out of money. Hitting Your Goal Slide 14 SafeMax 4% Sustainability Depends on: Volatility Sequence Risk Safe Withdrawal Rate Slide 15 Progression of Retirement Planning 1 st Generation 2nd Generation 4% Withdrawal Rate 30 year projections No Contingency Planning Defined Benefit Plans + 4% Withdrawal Rate 30 year projections Defined Benefit Plans + What is the Failure Rate? Use Monte Carlo Simulation

7 Slide 16 3rd Generation Monte Carlo Simulations Variable Withdrawal Rates Inflation Global Diversification Calculated Failure Rates Include LE projections Use Annuities to Build Income Floor Loss of DB Plans Convert to 401k More Reliance on Social Security 4th Generation Variable Withdrawal Rates Include LE projections Calculate Failure Rates Global Diversification Monte Carlo Simulation Use Annuities to Build Income Floor Social Security Income Glidepath Flooring & Funding Ratio Real Estate and Trust Deeds Life Expectancy Annuities Slide 17 WHAT DROVE THESE CHANGES? Slide Investment And Portfolio Risk; 2. Consumption And Inflation Risk RISK And Finally 3. Mortality And Longevity Risk

8 Slide 19 Consumption Old Way of Thinking About Spending: Income + Inflation Retirement Life Expectancy Slide 20 The REAL Consumption Pattern The New Way Of Thinking About Spending: Go Go Years Slow Go Years No Go Years Slide 21 Retirement Glidepath Retirement Income Early Mid Go-Go Slow-Go No-Go Years Years Years Years Years Retirement Phases

9 Slide 22 Retirement Income Challenge (Goals) Longevity Inflation Investment Returns Health Care Retirement Goals Sequence Risk Fees and Expenses Slide 23 How Much Capital Is Needed? Rule of Thumb 20 TIMES Income = AGE 70 WHAT IS YOUR NUMBER? 23 Slide 24 The Amount You Need At Retirement to Make It To Age 90 $100,000 of Real 70 (20 TIMES = $2,000,000) Depends on When You Start

10 Slide 25 How Much Do You Have To Save Each 7%? 70 $2,000,000 Per 25 $7,000 $ 30 $10,000 $ 35 $15,000 $ 40 $21,000 $ 45 $31,000 $ 50 $50,000 $ 55 $80,000 $ 6667 What Is Your OTHER Number? Slide 26 $2,500,000 Ratio of Contributions to Retirement Capital $2,000,000 $1,500,000 60% $1,000,000 $500,000 $ Contributions Capital Slide 27 Life Expectancy

11 Slide 28 What Is Life Expectancy? 50% 50% 86 All 70 YOs Slide Slide 30 Inflation

12 Slide 31 Today What is INFLATION? 30 Years from NOW Slide Inflation Adjusted S&P500 $2105 Inflation Rate Since % $ Real Returns Nominal Returns Slide 33 Maintaining Purchasing Power $50,000 $23,880 $43,172 $37,205 $32,093 $27,684 $20,599

13 Slide 34 Use the Rule of 72 3% 72 = 24 Years Age Income $100,000 $100,000 $100,000 $100,000 $100,000 Inflation Adj $326,160 $242,726 $180,160 $134,392 $100,000 Capital $6,524,076 $4,854,525 $3,612,222 $2,687,833 $2,000,000 Heuristic 65 times 50 times 35 times 30 times 20 times Slide 35 THE 3 RD QUESTION CREATING A PROCESS. Slide 36 Dalbar Study Average Investors 3.4% - 20 year Return

14 Slide 37 Keys Issues Bothering Investors Most Investors are NERVOUS about where to put their money. Most Investors have no idea how much RISK isn in their portfolio. Most Investors are NOT AWARE of an investment Process backed by FOUR Nobel Prizes in Economics. Most Investors are UNAWARE of how much they are paying for the privilege of investing. Who Can I trust to help me and how do I know? Slide 38 Guess People Which Can Way See The Patterns Market in Will Anything. Go Next? Australia Slide Not understanding Volatility 2. Not knowing how to construct a portfolio 3. High Fees and Expenses 4. Taxation on growth There are FOUR Factors

15 For illustrative purposes only. Dollars Slide 40 Fees and Expenses Diversification Rebalancing Three Keys to Managing Your Portfolio Slide 41 Fees Matter Fees matter. Over long time periods, high management fees and related expenses can be a significant drag on wealth creation. Passive investments generally maintain lower fees than the average actively managed investment by minimizing trading costs and eliminating the costs of researching stocks. $500,000 Earning 10% Annualized Return over 25 Years 1% Fee $4,311,540 $5,000,000 21% 37% $4,000,000 2% Fee $3,424,237 3% Fee $3,000,000 $2,713,716 $2,000,000 $1,000,000 1 Year 3 Years 5 Years 10 Years 20 Years 30 Years Time Slide 42 Three Primary Fees You Can Control Fund Fees Trading Costs Bid Ask Spread Managing Fees

16 Slide 43 The KEY to Diversification Four Typical Asset Classes: Cash Bonds or Debt Stocks or Equities Real Estate Applying CAPM To Investing Slide 44 What are Expected Returns? Slide 45 Dealing with Bubbles $4, Total Market Return

17 Slide 46 Large Small Portfolio Construction 46 Slide 47 Growth Value Large Re-rank Stocks Based on % BtM Small Slide 48 Large Growth Small Growth Large Value Small Value Portfolio Construction 48

18 Slide 49 LARGE GROWTH $2,214 σ=18.8% $4,404 Total Market Return σ =18.75% Growth of $1 from 1926 to Slide 50 LARGE GROWTH $2,214 σ=18.8% SMALL GROWTH $1,838 σ=28.3% $4,404 Total Market Return σ =18.75% Growth of $1 from 1926 to Slide 51 LARGE GROWTH $2,214 σ=18.8% SMALL GROWTH $1,838 σ=28.3% $4,404 Total Market Return σ =18.75% Growth of $1 from 1926 to 2015 LARGE VALUE $9,831 σ=26.2% 51

19 Slide 52 LARGE GROWTH $2,214 σ=18.8% SMALL GROWTH $1,838 σ=28.3% $4,404 Total Market Return σ =18.75% Growth of $1 from 1926 to 2015 LARGE VALUE $9,831 σ=26.2% SMALL VALUE??????? 52 Slide 53 LARGE GROWTH $2,214 σ=18.8% SMALL GROWTH $1,838 σ=28.3% $4,404 Total Market Return σ =18.75% Growth of $1 from 1926 to 2015 LARGE VALUE $9,831 σ=26.2% SMALL VALUE??????? $67,788 σ=30.1% 53 Slide 54 GAP S&P 500 0% 5% 10% 15% 20% 25% Optimizing The EFFICIENT FRONTIER

20 Risk Slide 55 Relationship of Risk to Return Return Optimization Slide 56 Mean SAME Return LESS Risk MORE Return SAME Risk Existing Portfolio What Investors Want? Variance Slide 57 How To Build a Balanced Portfolio Small Value Balanced Large Value Mean Expected Return Large Growth Small Growth Fixed Variance Risk

21 Slide 58 The Power of REBALANCING Slide 59 StockA StockB $1000 Investing in an Up or Down Market $2000 Both Cases End up back at $1000 $500 Slide 60 StockA 50% $500 $500 StockB 50% Diversify our $ /50 $1000 SAME Performance Ends up With SAME $ 500 $1000 $ 500 $250 Portfolio Value $1250

22 Slide 61 StockA 50% $500 Diversify our $ /50 + Rebalance $1000$ 625 $250 $625 SAME Performance Ends up With $1563 $ 313 $1250 $500 Instead of $1000 StockB 50% Portfolio Value $1250 Slide 62