Generational Distinctions in Retirement Planning

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1 Generational Distinctions in Retirement Planning Frank O Connor - VP, Research and Outreach IRI Steve Cooney VP Annuity Business Development & Innovation Nationwide David Laster, PhD, CFA Managing Director, Head of Retirement Strategies Bank of America Merrill Lynch

2 If you experience technical issues at any point of the webinar, dial *0 to be connected to an operator. CE Information If you wish to receive CE credit toward your CFP Board or IMCA designation for this webinar you must: Attend the webinar for at least 50 minutes Following the completion of the webinar, look for an from which will contain a link to fill out our CE Webinar Form

3 Baby Boomer Retirement Readiness Confident Savings Will Last Throughout Retirement 24% 36% Adequately Preparing for Retirement 22% 41% Enough Saved for Health Care 27% 37% Enough Saved for Long-Term Care 16% 24% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% Source: IRI

4 Know Their Number 100% 90% 80% 70% 60% 50% 40% 39% 42% 30% 29% 20% 10% 0% Baby Boomers Generation X Millennials Source: IRI

5 Have Retirement Savings 100% 90% 80% 70% 64% 68% 60% 55% 50% 40% 30% 20% 10% 0% Baby Boomers Generation X Millennials Source: IRI

6 60% Less Than $100,000 Saved 56% 50% 42% 40% 30% 20% 10% 0% Baby Boomers Generation X Source: IRI

7 Greater Than $100,000 Saved With Financial Advisor 78% Without Financial Advisor 40% Annuity Owner 68% Non-Annuity Owner 50% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% Source: IRI

8 Inadequate Savings, Inadequate Income Average 401(k) $96,288 $6k income Median 401(k) $26,405 $1,500 income Average SS Benefit $16k Total Income $17,500 - $22k Average Retiree Expense $46k Income Gap $24k - $29k Sources: IRI, Social Security Administration, Bureau of Labor Statistics,

9 Understanding Generational Shifts Boomers, Gen Xers and Millennials Steve Cooney VP Annuity Business Development & Innovation Distributor Use Only Not to be Used with the Public

10 Neither Nationwide or any of its investment professionals give tax, legal or investment advice. For such guidance, please contact your legal or professional advisor. Nationwide and IRI are separate and non-affiliated companies. Nationwide does not control any third party presenting information and is not responsible for their comments. Sponsorship of a third party does not imply endorsement of the information presented. Views and opinions are those of the speaker and do not necessarily represent the opinions of Nationwide Nationwide Investment Services Corporation (NISC), member FINRA. Nationwide, the Nationwide N and Eagle, Nationwide is on your side are service marks of Nationwide Mutual Insurance Company Nationwide. NFM-15857AO (9/16) September 2016 Distributor Use Only 9

11 What is a Generation? Defined group, typically years Share same cultural experiences Distinct behaviors from previous generations United by a defining moment: I know exactly where I was when Source: British Journal of Sociology (Volume 5, Issue 3), September 1994 Baby Boomer Magazine September 2016 Distributor Use Only 10

12 The Generations Baby Boomers Generation X Millennials Born million today Oldest are 70 Born million today Oldest are 51 Born million today Oldest are 36 Source: US Census September 2016 Distributor Use Only 11

13 Boomers Formative Years: Values and Behaviors Generally optimistic Generation that lived to work Relatively wealthy About to redefine retirement Adapting to new technology and part of the mobile revolution More likely to boycott Source: Facts and Statistics Baby Boomer Magazine, 2013 September 2016 Distributor Use Only 12

14 Generation X Formative Years: Values and Behaviors Extremely self-reliant Well educated Focused on work/life balance Technologically-literate Fun, informal and skeptical Collaborative and good problem solvers Source: Gen X: The Ignored Generation, Time, 2008 September 2016 Distributor Use Only 13

15 Millennials Formative Years: Present Values and Behaviors Technologically savvy Well educated, diverse and egalitarian Masters of self-expression High self-esteem and assertive Saving for retirement at higher rates than previous generations Source: The Millennial Generation Research Review National Chamber Foundation September 2016 Distributor Use Only 14

16 Summary / Conclusions Generations are cohorts of individuals, typically born within a year time period, shaped by the same cultural experiences Generations have distinct behaviors based on their different culture experiences and defining moments In general, Boomers are more optimistic, Gen Xers are more skeptical, and Millennials are more confident While Generation X is the smallest demographic, the oldest members are 51 years old and retirement planning is becoming more important September 2016 Distributor Use Only 15

17 Generational Distinctions in Retirement Planning David Laster, Ph.D., CFA, Managing Director Head of Retirement Strategies Bank of America Merrill Lynch Insured Retirement Institute webinar 14 September 2016 FOR INVESTMENT PROFESSIONAL USE ONLY. DISTRIBUTION TO ANY OTHER AUDIENCE IS PROHIBITED. We re better when we re connected

18 Important Disclosures: All guarantees and benefits of the insurance policy are backed by the claims-paying ability of the issuing insurance company. They are not backed by Merrill Lynch or its affiliates, nor do Merrill Lynch or its affiliates make any representations or guarantees regarding the claims-paying ability of the issuing insurance company. Merrill Lynch Wealth Management makes available products and services offered by Merrill Lynch, Pierce, Fenner & Smith Incorporated, a registered broker-dealer and member SIPC, and other subsidiaries of Bank of America Corporation. Merrill Lynch Life Agency Inc. ( MLLA ) is a licensed insurance agency. Both are wholly owned subsidiaries of BofA Corp. Investment products offered through MLPF&S and insurance and annuity products offered through MLLA: Are Not FDIC Insured Are Not Bank Guaranteed May Lose Value Are Not Deposits Are Not Insured by any Federal Government Agency Are Not a Condition to Any Banking Service or Activity 2016 Bank of America Corporation. All rights reserved. September 2016 ARR6886G FOR INVESTMENT PROFESSIONAL USE ONLY. DISTRIBUTION TO ANY OTHER AUDIENCE IS PROHIBITED.

19 Agenda Major retirement concerns How much saving is attainable? Key retirement risks Helping clients not outlive their wealth Conclusions FOR INVESTMENT PROFESSIONAL USE ONLY. DISTRIBUTION TO ANY OTHER AUDIENCE IS PROHIBITED.

20 Many Americans are worried about retirement MAJOR CONCERNS Percentage of retirees very confident in having enough money to live comfortably throughout their retirement years Source: Employee Benefit Research Institute and Matthew Greenwald & Associates, Inc., 2007 and 2013 Retirement Confidence Surveys FOR INVESTMENT PROFESSIONAL USE ONLY. DISTRIBUTION TO ANY OTHER AUDIENCE IS PROHIBITED.

21 What are retirees saying? MAJOR CONCERNS Top financial worries for retirement Source: Americans Perspectives on New Retirement Realities and the Longevity Bonus: A 2013 Merrill Lynch Retirement Study, conducted in partnership with Age Wave Base: Respondents with investable assets above $250,000 FOR INVESTMENT PROFESSIONAL USE ONLY. DISTRIBUTION TO ANY OTHER AUDIENCE IS PROHIBITED.

22 What does success look like? ATTAINABLE SAVINGS FOR INVESTMENT PROFESSIONAL USE ONLY. DISTRIBUTION TO ANY OTHER AUDIENCE IS PROHIBITED.

23 Key risks for retirees PERSONAL KEY RETIREMENT RISKS Longevity Health care MARKET Sequence of returns Inflation FOR INVESTMENT PROFESSIONAL USE ONLY. DISTRIBUTION TO ANY OTHER AUDIENCE IS PROHIBITED.

24 Longevity risk KEY RETIREMENT RISKS For a couple, both age 65, at least one spouse can expect to reach: Source: GWIM CIO calculations based on Society of Actuaries, 2012 Individual Annuity Mortality Tables, Basic. FOR INVESTMENT PROFESSIONAL USE ONLY. DISTRIBUTION TO ANY OTHER AUDIENCE IS PROHIBITED.

25 Health care risk KEY RETIREMENT RISKS Of Americans now turning 65: Source: Centers for Medicare & Medicaid Services, 2015 Medicare & You, National Medicare Handbook, September FOR INVESTMENT PROFESSIONAL USE ONLY. DISTRIBUTION TO ANY OTHER AUDIENCE IS PROHIBITED.

26 Sequence of returns risk KEY RETIREMENT RISKS Evolution of the Value of a Diversified Portfolio, ILLUSTRATIVE EXAMPLE $1.8 $1.6 Actual history $1.23M $1.4 $1.2 Retired in 1988 with $500K (in Millions) $1.0 $0.8 $0.6 $0.4 $0.2 $0.0 Reverse history $330,000 Invested in a diversified portfolio, rebalancing annually Drew down $25K first year Increased spending with inflation Actual sequence of returns ( ) Realized returns in reverse order ( ) Notes: Assumes a $500,000 investment that at year-end 1988 was allocated 60% to U.S. stocks (proxied by the S&P 500 Index), 35% to U.S. bonds (Merrill Lynch Broad Market Index) and 5% to Cash (1- month Treasury bills) and rebalanced annually. It is not possible to invest directly in these unmanaged indexes. Annual spending is $25,000 for the first year and rises in subsequent years with inflation (CPI-U). Withdrawals are taken at the beginning of each year. Past performance cannot and should not be viewed as indicative of future performance. Source: GWIM CIO FOR INVESTMENT PROFESSIONAL USE ONLY. DISTRIBUTION TO ANY OTHER AUDIENCE IS PROHIBITED.

27 Inflation risk KEY RETIREMENT RISKS Source: United States Postal Service FOR INVESTMENT PROFESSIONAL USE ONLY. DISTRIBUTION TO ANY OTHER AUDIENCE IS PROHIBITED.

28 Key client goal: Help make my money last in retirement HELP CLIENTS NOT OUTLIVE THEIR ASSETS To close an essential spending gap: Bolster Social Security Allocate some assets to lifetime income annuities Draw down assets from a balanced portfolio Provide a minimum level of income that rises with inflation FOR INVESTMENT PROFESSIONAL USE ONLY. DISTRIBUTION TO ANY OTHER AUDIENCE IS PROHIBITED.

29 Bolster Social Security HELP CLIENTS NOT OUTLIVE THEIR ASSETS Trade-off between claiming age and annual benefits: An illustrative example Annual benefit $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $31,680 $29,760 $27,840 $25,920 $22,400 $24,000 $20,800 $19,200 $18,000 Claiming at age 70 instead of age 62 can raise lifetime monthly benefits by 76%. $5,000 $ Claiming age Source: Merrill Lynch GWIM CIO calculations based on Social Security Administration data available at < early_late.html#drctable>, accessed February FOR INVESTMENT PROFESSIONAL USE ONLY. DISTRIBUTION TO ANY OTHER AUDIENCE IS PROHIBITED.

30 Allocate some assets to lifetime income annuities What the experts say HELP CLIENTS NOT OUTLIVE THEIR ASSETS Experts we interviewed tended to recommend that retirees draw down their savings strategically and systematically and that they convert a portion of their savings into an income annuity to cover necessary expenses. 1 - U.S. GAO Most financial, public and insurance economists would agree (something that is rare) that life annuities, longevity insurance, and guaranteed pensions have an important role to play in the optimal retirement portfolio [A]ll of these researchers agree that life annuities are a legitimate and core product for the optimal retirement portfolio. 2 Professor Moshe A. Milevsky, York University 1 U.S. Government Accountability Office, Retirement Income: Ensuring Income throughout Retirement Requires Difficult Choices, June 2011, p Moshe A. Milevsky, Life Annuities: An Optimal Product for Retirement Income, CFA Monograph, p FOR INVESTMENT PROFESSIONAL USE ONLY. DISTRIBUTION TO ANY OTHER AUDIENCE IS PROHIBITED.

31 Draw down assets from a balanced portfolio HELP CLIENTS NOT OUTLIVE THEIR ASSETS Rethinking the 4% rule Modest Spending Rates Age Male Female Joint % 3.2% 3.0% % 3.9% 3.7% % 5.2% 4.9% % 7.5% 7.2% Notes: The modest spending rate is the maximum initial share of wealth that a client is believed to be able to spend while attaining a 90 percent probability of success. The probability of success measures the likelihood that a retiree will be able to spend according to plan without exhausting her wealth. Spending is assumed to rise each year with inflation. Clients are assumed to choose the allocation to stocks, bonds and cash that minimizes their expected lifetime shortfall the amount, on average, they can expect to undershoot their lifetime spending plans. Source: David Laster, Anil Suri and Nevenka Vrdoljak, Systematic Withdrawal Strategies for Retirees, Journal of Wealth Management, Vol. 15, No. 3 (Winter 2012), pp FOR INVESTMENT PROFESSIONAL USE ONLY. DISTRIBUTION TO ANY OTHER AUDIENCE IS PROHIBITED.

32 Draw down assets from a balanced portfolio (continued) HELP CLIENTS NOT OUTLIVE THEIR ASSETS Historical perspective: The impact of spending moderately The evolution of the value of a diversified portfolio for various spending rates. Those who draw down their wealth too rapidly risk depleting their savings. Notes: Assumes a $250,000 investment that at year-end 1972 was allocated half to U.S. stocks (proxied by the S&P 500 Index) and half to U.S. bonds ( : Ibbotson U.S. Intermediate Government Bond Index; : Merrill Lynch Broad Market Index) and rebalanced annually. It is not possible to invest directly in these unmanaged indexes. Returns are net of annual fees of 1.3%. Annual spending as a percentage of the portfolio for the first year is as indicated in the figure and rises in subsequent years with inflation (CPI-U). Withdrawals are taken at the end of each year. These hypothetical results are for illustrative purposes only and are not meant to represent the past or future performance of any specific investment vehicle. Investment return and principal value will fluctuate and, when redeemed, the investments may be worth more or less than their original cost. Past performance cannot and should not be viewed as indicative of future performance. Source: David Laster, Anil Suri and Nevenka Vrdoljak, Pitfalls in Retirement, Merrill Lynch Wealth Management, Winter FOR INVESTMENT PROFESSIONAL USE ONLY. DISTRIBUTION TO ANY OTHER AUDIENCE IS PROHIBITED.

33 Conclusions Clients and prospects feel uncertain about retirement You can help alleviate their concerns by being their go-to guide on: - Saving for retirement - Investing long-term and spending sustainably - Social Security claiming strategies - Procuring guaranteed lifetime income, if appropriate Helping with these concerns will solidify your role as trusted advisor FOR INVESTMENT PROFESSIONAL USE ONLY. DISTRIBUTION TO ANY OTHER AUDIENCE IS PROHIBITED.

34 Questions? Frank O Connor Vice President, Research and Outreach Insured Retirement Institute foconnor@irionline.org (202) For Broker Dealer Use Only Not For Distribution to the Public 33

35 . CE Information If you wish to receive CE credit toward your CFP Board or IMCA designation for this webinar you must: Attend the webinar for at least 50 minutes Following the completion of the webinar, look for an from which will contain a link to fill out our CE Webinar Form For Broker Dealer Use Only Not For Distribution to the Public 34

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