10 Retirement Income Insights. Stephen Rathford, Regional Vice President, New York Life

Transcription

1 10 Retirement Income Insights Stephen Rathford, Regional Vice President, New York Life

2 Success in the retirement market requires a different approach 2

3 Retirees face different financial risks Accumulation Phase Distribution Phase Investment risk Investment risk Sequence of return risk Sequence of return risk Longevity risk Longevity risk Withdrawal rate risk Withdrawal rate risk 3

4 Retirement planning and advice is different, too Accumulation Phase Distribution Phase Investment Products Client Service Investment Products Client Service Healthcare Issues Relationship Management Asset Allocation Relationship Management Cash Management Social Security Insurance Products Retirement Plans/ IRA Rules Source: New York Life analysis of Retirement Solutions: Achieving Success in the Retirement Income Market; The Financial Advisor Guidebook 1.0, Raymond James,

5 Disclosures This material is being provided for informational purposes only, and was not prepared, and is not intended, to address the needs, circumstances and objectives of any of individual or groups of individuals. New York Life and its affiliates are not making a recommendation that any of your particular clients purchase any specific products. The U.S. Department of Labor has adopted new fiduciary regulations that are applicable to IRAs and plans subject to the Employee Retirement Income Security Act ( ERISA ) on and after April 10, 2017 (the DOL Rule ). Brokers, registered representatives and distributors should consult with their own tax and legal advisors regarding the impact of the DOL Rule. Please understand that New York Life, its subsidiaries, agents, and employees do not provide legal, tax, investment or ERISA advice. 5

6 10 retirement income insights 6

7 # 1 Retirement income isn t one-size-fits-all 7

8 Clients have different mindsets about retirement income. Each mindset requires a different approach. Individuals may want to: Reduce Risk Increase Income Stay Flexible Their mindset: Worriers Generation More Open Enders 8

9 # 2 Supply & demand drives the retirement income industry Worriers 9

10 Supply of secure retirement income is diminishing Carrier pull back on living benefits Unoptimized Social Security benefits Decline of pensions VA carriers de-risk or exit market completely Age 62 is the most popular time to start taking benefits, accounting for 50% of claims by women & 45% of claims by men in recent years. * American workers retiring with pensions: 1980: 80% Today: 25% * Source: Bank of America Merrill Lynch, Worriers 10

11 Boomer age wave drives market demand Population Growth by Age: 60.0% 50.0% Retirement Opportunity 40.0% 30.0% 20.0% 10.0% 0.0% -10.0% -20.0% Source: US Census Bureau, Worriers 11

12 Boomer age wave drives market demand Population Growth by Age: 60.0% 50.0% E Retirement Opportunity 40.0% 30.0% 20.0% 10.0% 0.0% -10.0% -20.0% Source: US Census Bureau, Worriers 12

13 # 3 Retirement portfolios are optimized by adding an income annuity Worriers 13

14 Return Modern Portfolio Theory Efficient Frontier (traditional assets) Portfolio C Portfolio B Volatility This is a hypothetical illustration and does not reflect the performance of any actual investment. Worriers 14

15 Framework for Retirement This is a hypothetical illustration and does not reflect the performance of any actual investment. Worriers 15

16 Efficient Income Frontier With Traditional Assets Only This is a hypothetical illustration and does not reflect the performance of any actual investment. Worriers 16

17 Efficient Income Frontier With Traditional Assets + Annuities This is a hypothetical illustration and does not reflect the performance of any actual investment. Worriers 17

18 Improving retirement portfolios Is a portfolio as efficient as it can be? Asset Allocation Income Risk Legacy Potential 40% Stocks Probability of running out of assets by age 95 $ left to heirs Portfolio A 60% Bonds 18% $860K Portfolio B (with income annuities) 40% Annuities 30% Bonds 30% Stocks 10% $890K See appendix for assumptions Worriers 18

19 EIF summary EIF considers risks that people face in retirement. Shows that income annuities can help retirees meet needs or seek higher upside potential with their remaining assets, for the same level of risk. Income annuities are valuable in retirement portfolios as they provide guaranteed income that clients can t outlive, are uncorrelated with the markets, and offer higher cash flows than bonds because of mortality credits. 19

20 # 4 Retirement is a tale of two cities Generation More 20

21 Income exceeds spending at every age in retirement Net Spenders: 25th Percentile (Average of $2,786 in investable wealth at age ) $40K $35K $30K $25K $20K $15K $10K $5K $K Net Savers: 75th Percentile (Average of $284,270 in investable wealth at age ) $120K $100K $80K $60K $40K $20K $K Income Consumption Source: New York Life analysis of data from University of Michigan Health and Retirement Study, 2014 Generation More 21

22 I wish I could, but I just can t afford it right now. Generation More 22

23 Certainty is Created by Reducing the Unknown Retirees who own long term care insurance consume more across every spending category than similarly-situated retirees without long term care insurance. Median spending for Individuals 65+ $40K $35K $30K $25K $20K $15K $10K $5K $K Do Not Own LTCi Own LTCi Health Home Related Food Transportation Cloth/Ent/Other Source: New York Life analysis of data from the Employee Benefit Research Institute's (EBRI) "Expenditure Patterns of Older Americans, " by Sudipto Banerjee, 2014 Generation More 23

24 # 5 Today s retirees redefine basic expenses Generation More 24

25 Today s retirees expect more out of retirement Health Care Internet Shopping 97% 95% 75% Weekend Getaway 62% HDTV 62% Vacation Smart Phone Prof. Hair Color The New Basic Expenses 60% 57% 47% Travel 46% Dining Out 42% Movies Elder Care 38% Source: 2017 NYL Consumer Retirement Income Planning Study, conducted by Greenwald & Associates 36% Generation More 25

26 # 6 Retirement-age individuals are overconfident & lack financial literacy Generation More 26

27 Respondents are wealthy and rely on their advisors 72% are retired 75% are married 42% are years-old 62% have at least Bachelor s degree 63% have an advisor; 90% rely on that advisor at least a moderate amount 47% have more than $4,000 monthly guaranteed income, not counting Social Security 59% have at least $300,000 in savings and investments 72% have traditional pension plan Source: New York Life analysis of The American College s RICP Retirement Income Literacy Survey, 2015 Generation More 27

28 Survey says, We re okay 91% are confident they ll have enough money to live comfortably in retirement. 48% are doing very good/excellent when it comes to saving for retirement. 39% say they are highly knowledgeable when it comes to saving for a comfortable retirement. Source: New York Life analysis of The American College s RICP Retirement Income Literacy Survey, 2015 Generation More 28

29 But we see some early red flags 4 in 10 say they re behind schedule when it comes to planning and saving for retirement 1/3 report that they have never tried to figure out how much money they ll need for retirement Source: New York Life analysis of The American College s RICP Retirement Income Literacy Survey, 2015 Generation More 29

30 Despite retirees positive outlook, only 2 in 10 pass the retirement literacy test. 80% Failed 1 Know the basics about Social Security and investments Know very little about retirement planning topics At least 1/3 responded Don t Know to most questions Higher levels of financial literacy appear to be associated with greater retirement readiness 2 1 New York Life analysis of The American College s RICP Retirement Income Literacy Survey, Employee Financial Literacy and Retirement Plan Behavior: A Case Study - June 2016 by Robert Clark, Annamaria Lusardi, and Olivia S. Mitchell of Pension Research Council, The Wharton School. Generation More 30

31 # 7 Retirees want flexibility and security Open Enders 31

32 Retirees rank control of their money highest when it comes to income solutions 1. Control of my money 2. Safety of principal 3. Keeps pace with inflation 4. Easy access to my money 5. Income payments cannot be outlived 6. Investments are easy to understand. 7. Limited taxes 8. High growth potential 9. Pays a guaranteed fixed monthly amount 10. Leaving behind money for kids or grandkids Source: New York Life analysis of survey conducted by Mathew Greenwald & Associates, Inc. and The Diversified Services Group, Inc., 2014 Open Enders 32

33 Client behavior indicates demand for income flexibility Source: New York Life, 2015 New York Life annuities are issued by New York Life Insurance and Annuity Corporation (NYLIAC) (A Delaware Corporation) a wholly-owned subsidiary of New York Life Insurance Company. Available in jurisdictions where approved. Neither New York Life, its subsidiaries, nor its agents can provide tax or legal advice. Clients should consult with their tax or legal professionals before taking any action. Open Enders 33

34 # 8 Clients may want to retire sooner Open Enders 34

35 If they could do it again, 46% of retirees would retire earlier New York Life asked retirees with at least $100,000 in investable assets: If you could ensure the same level of financial security you had when you actually retired, would you retire early? And if so, how much earlier? Some retirees say: Retire as soon as you can 46% said yes Average of four years earlier 74% said they would be interested in financial solutions that could have helped make it possible 4 Money Moves For A Happier Retirement Add time to the front end of retirement with proper planning This is the retirement regret nobody talks about Source: New York Life and Ipsos Retire Sooner Survey, 2015 Open Enders 35

36 Deferred Income Annuities help people retire sooner New York Life conducted research that shows that in certain scenarios, purchasing a DIA in pre-retirement years allows individuals to retire up to two years earlier without incurring additional risk as measured by the probability of running out of money during the retiree s projected lifetime 1. That means more time enjoying life without work: traveling, spending time with grandchildren, etc. These results show that the optimal asset allocation for retirement income planning consists of lower allocations to bonds and higher allocations to stocks and income annuities. The relative inefficiency of bonds is driven by the fact that they lack the upside potential of stocks and cannot match the income and longevity benefits of income annuities. When interest rates are low, retirees are forced to spend at a rate which is lower than the yield they can generate from their bond portfolios or they risk running out of money. 1 To determine the planning horizon for Males age 55 and 58 we used a life expectancy of 94 years, which is the 75% percentile of life expectancy according to the Society of Actuaries Annuity 2012 tables. 36

37 # 9 Guaranteed income is an asset class 37

38 Retirement Building Blocks: Sustainable Income Classes For the affluent, Fixed Income Equity Income retirement portfolios include income from four Coupon income from Dividend income from income classes that can generate sustainable income for a lifetime Municipal Bonds Government Bonds Corporate Bonds Dividend Stocks Traditional without risk of exhaustion. Lifetime payouts from Lifetime withdrawals from Income Annuities Deferred Income Annuities Variable Annuities with Guaranteed Living Benefits (GLBs) Fixed Indexed Annuities with GLBs Insured * *Insured income refers to guaranteed income backed by the claims-paying ability of the company issuing the financial product, usually an insurance company. 38

39 Client Needs Drive Income Class Selection Depending on the client objective, risk tolerance, and time horizon, different income classes may be appropriate. Hypothetical Income Class Performance Client s Objective Metric 1 st 2 nd 3 rd 4 th More Income Average Annual Income 1 Insured Fixed Income Traditional Fixed Income Insured Equity Income Traditional Equity Income More Income Stability Standard Deviation of Annual Income 2 Insured Fixed Income Insured Equity Income Traditional Equity Income Traditional Fixed Income More Capital Growth Capital Growth 3 Traditional Equity Income Traditional Fixed Income Insured Equity Income Insured Fixed Income Because of the purely hypothetical nature of the information presented based on certain assumptions, it does not represent any specific product; no client actually had, or could have had, the results and income characteristics shown for a specified period. This is based on historical data as described on the Assumptions page - see Appendix. Past performance is no guarantee of future results. 1 Average Annual Income: The average annual income generated across a 30 year retirement period. 2 Standard Deviation of Average Annual Income: The standard deviation of annual income across a 30 year retirement period. 3 Capital Growth: For a $100,000 investment, the accumulated account balance at the end of a 30 year retirement period. 39

40 Not all income is alike Payout Rates as of 12/28/2015, Life with Cash Refund Option. This example is for illustrative purposes only. Payout rates are subject to change and may vary depending on premium amount, age, gender, and income options selected. Source: New York Life actuarial analysis. Graphical representation based on an example introduced by Dr. David Blake. This illustration does not reflect the tax treatment of income payments. Please consult your own tax professional for advice. 40

41 1/3/11 4/3/11 7/3/11 10/3/11 1/3/12 4/3/12 7/3/12 10/3/12 1/3/13 4/3/13 7/3/13 10/3/13 1/3/14 4/3/14 7/3/14 10/3/14 1/3/15 4/3/15 7/3/15 10/3/15 1/3/16 4/3/16 7/3/16 Income annuities aren t derailed by interest rates 9% 8% 7% 6% 5% 4% GLI Payout Rates vs. 10 year Treasury Rates 8% decline in Guaranteed Lifetime Income Annuity II (GLI) payout rates between January 2011 and August 2016 Based on rates for male, age 75, $100,000 premium, Life with 10 Year Period Certain payout option. Rates vary based on premium, gender, age, and payout option selected. 3% 2% 1% 53% decline in 10-year Treasury rates between January 2011 and August % Based on historical prices, U.S. Department of the Treasury For illustrative purposes only. GLI Rate Treasury Rate 41

42 # 10 Guarantees matter 42

43 Because Guarantees Make People Happier Retirees get more satisfaction from each dollar of Social Security and pension income than they do from other sources of income. Source: What Makes a Successful Retirement? Research Magazine

44 Because Nobody Wants to Worry 40% of 401(k) participants said Building adequate retirement savings is the most common cause of stress 2 56% of Americans are losing sleep over retirement, including both those who are saving and those who aren t 1. 1 Ramsey Solutions survey 2016, 2. Charles Schwab survey 2016, Participant_Study_2016_deck.pdf 44

45 Because Retirees Want Them 31% of current retirees are interested in converting over 20% of their assets into a pensionlike stream of income 96% of current retirees said having monthly income in retirement that guaranteed to be paid as long as they live is valuable Source: Ipsos/New York Life survey of retirees,

46 Because Retirees Want Them 9 in 10 of current retirees said having guaranteed lifetime income in retirement increased sense of financial security, and lead to a more fulfilling retirement 80% of current retirees said having guaranteed lifetime income in retirement increased their confidence in maintaining comfortable lifestyle, and decreased stress in retirement Source: 2017 NYL Consumer Retirement Income Planning Study 46

47 Pre-Retirees Want Them Too 79% of working Americans age are willing to give up 10% of current salary to get more guaranteed lifetime income when retire Source: 2017 NYL Consumer Retirement Income Planning Study 47

48 Top 10 Retirement Insights 1. Retirement income isn t one-size-fits-all 2. Supply and demand drives the retirement income industry 3. Retirement portfolios are optimized by adding an income annuity 4. Retirement is a tale of two cities 5. Today s retirees redefine basic expenses 6. Retirement-age individuals are overconfident and lack financial literacy 7. Retirees want flexibility and security 8. Clients may want to retire sooner 9. Guaranteed income is an asset class 10. Guarantees matter 48

49 Positioning guaranteed income solutions according to mindset Positioning guaranteed income solutions according to mindset 49

50 A solutions-based approach to retirement income. For Life Single Premium Immediate Annuity (SPIA) Income Now Need: For a Period of Time Single Premium Immediate Annuity (SPIA) Retirement Income Maximum Income Deferred Income Annuity May be appropriate for Worriers Income Later Some Access to Money Fixed Deferred Annuity (FDA) with Guaranteed Lifetime Withdrawal Benefit (GLWB) May be appropriate for Generation More May be Appropriate for Open Enders New York Life annuities are issued by New York Life Insurance and Annuity Corporation (NYLIAC) (A Delaware Corporation), a wholly owned subsidiary of New York Life Insurance Company, 51 Madison Avenue, New York, NY Guarantees are based on the claims-paying ability of the issuer. Products available in jurisdictions where approved. 50

51 May be appropriate for Worriers May be appropriate for Generation More May be Appropriate for Open Enders Need: Retirement Income Income Now For Life For a Period of Time Maximum Income Single Premium Immediate Annuity (SPIA) Single Premium Immediate Annuity (SPIA) Deferred Income Annuity (DIA) Income Later Single Premium Immediate Annuity (SPIA) Some Access to Money Fixed Deferred Annuity (FDA) with Guaranteed Lifetime Withdrawal Benefit (GLWB) Client starts receiving lifetime payments in exchange for a lump sum premium Provides lifetime income for one or two lives 51

52 May be appropriate for Worriers May be appropriate for Generation More May be Appropriate for Open Enders Need: Retirement Income Income Now Income Later For Life For a Period of Time Maximum Income Some Access to Money Single Premium Immediate Annuity (SPIA) Single Premium Immediate Annuity (SPIA) Deferred Income Annuity (DIA) Fixed Deferred Annuity (FDA) with Guaranteed Lifetime Withdrawal Benefit (GLWB) Single Premium Immediate Annuity (SPIA) Client starts receiving payments in exchange for a lump sum premium. Payments last for a specific amount of time as selected by the client. 52

53 May be appropriate for Worriers May be appropriate for Generation More May be Appropriate for Open Enders Need: Retirement Income Deferred Income Annuity (DIA) Income Now Income Later For Life For a Period of Time Maximum Income Some Access to Money Single Premium Immediate Annuity (SPIA) Single Premium Immediate Annuity (SPIA) Deferred Income Annuity (DIA) Fixed Deferred Annuity (FDA) with Guaranteed Lifetime Withdrawal Benefit (GLWB) Client receives lifetime payments in two to 40 years in exchange for one or more flexible premium payments. 53

54 May be appropriate for Worriers May be appropriate for Generation More May be Appropriate for Open Enders Need: Retirement Income Income Now Income Later For Life For a Period of Time Maximum Income Some Access to Money Single Premium Immediate Annuity (SPIA) Single Premium Immediate Annuity (SPIA) Deferred Income Annuity (DIA) Fixed Deferred Annuity (FDA) with Guaranteed Lifetime Withdrawal Benefit (GLWB) Fixed deferred annuity with the income generating power of the Guaranteed Lifetime Withdrawal Benefit (GLWB) rider, which provides guaranteed income for life. The Income Base: Grows at a compounded rate during the first 10 years The Accumulation Value: Grows at an initial guaranteed fixed interest rate for 7 years 54

55 Your next steps 1. Identify 5 clients who may benefit from guaranteed income in retirement and why? What s their mindset? 2. Run a quote for each of these 5 clients. 3. Use the information presented today to have a more impactful conversation about retirement income. 55

56 Thank you! Thank you! 56

57 Appendix Appendix 57

58 EIF Assumptions The simulations were run for a 65 year-old female with a life expectancy of 95 (this age represents the 75 th percentile in longevity). Source for life expectancy: Society of Actuaries Annuity 2012 Basic Mortality Table with Scale G2 improvement factors. The method used 500 Monte Carlo simulations for each of the portfolios. For equity return assumptions, we use historical returns obtained from economist Robert Shiller's online dataset ( A Monte Carlo simulation analyzes probabilities and seeks to identify a portfolio with an optimal balance of risk and reward potential, given your financial profile. The simulation is hypothetical, does not reflect past performance, and is not a forecast of future results. Simulation results may vary with each use and over time. Each client s results depend on individual factors which a simulation does not account for, such as how investment decisions are implemented in reality and the costs of investing. A simulation may not capture how asset classes fall in and out of favor over time. These factors can influence a client s results materially. Historical returns were averaged from , with Equity returns averaging 10.4% with a 17.9% standard deviation, and Fixed Income returns averaging 4.9% with a 6.2% standard deviation. These returns were used as a proxy to represent the overall equity and fixed income markets and applies it to information that you provided concerning your portfolio s general allocation between stocks and bonds. We use a correlation coefficient of 5.3% based on historical returns from to measure the statistical relationship between the performance of the equity and fixed income proxy information used. Income payments are based upon the average Life-Only payout rates offered by A++ rated (A.M. Best, 01/03/2017) Single Premium Immediate Annuity (SPIA) providers, effective 01/03/2017, among the LIMRA Association top 10 SPIA providers as of 01/03/2017. Generally, the life-only payout will provide the highest payout rate, but income payments end when the annuitant dies, and there is no death benefit. The payout rate is based on a Female annuitant, age 65, net of any ongoing fees, including mortality and expense fees. A lifetime income annuity is a fixed immediate annuity that provides payments for the lifetime of the annuitant,comprising both interest and return of premium. 58

59 Assumptions for Income Class Example Traditional equity income (today, typically stocks) are large company stocks as defined by Ibbotson s SBBI 2012 Classic Yearbook. * Average annual income is based on the sum of the dividends paid over each 30-year period, divided by 30. The standard deviation of annual income is based on the dividends paid over each 30-year period. The capital growth is based on the value of a $100,000 investment after 30 years, after spending dividend income. Traditional fixed income (today, typically bonds) are long-term government bonds as defined by Ibbotson s SBBI 2012 Classic Yearbook. Average annual income is based on the sum of income generated by coupons and scheduled changes in price (premium/discount bonds moving towards par) over each 30-year period, divided by 30. The standard deviation of annual income is based on the income generated by coupons and scheduled changes in price (premium/discount bonds moving towards par) over each 30-year period. The capital growth is based on the value of a $100,000 investment after 30 years, after spending coupon income and scheduled changes in price (premium/discount bonds moving towards par). Insured fixed lifetime income (today, traditionally SPIAs) are based on hypothetical historical prices created using actuarial methods, which combine historical 10-Year Treasury interest rates and mortality rates from the Annuity 2000 mortality table, based on a 70-year-old couple. Average annual income is based on the sum of income received over the 30 year period, divided by 30. The standard deviation of annual income is based on the income received over the 30 year period. SPIAs have no capital growth. Insured equity lifetime income (today, traditionally VAs with GLBs) is a hypothetical income-producing product that has the following attributes: An investment account invested 70% in stocks and 30% in bonds (as defined above), rebalanced annually, with fees of 2.25%. Income starts at 5% of the initial investment and permanently steps up if and when the account value exceeds the benefit base, which is the previous high-water mark of the end-of-year account balance. An additional fee of 1.05% of the benefit base is also charged against the account value. Average annual income is based on the sum of income received over the 30 year period, divided by 30. The standard deviation of annual income is based on income received over the 30 year period. The capital growth is based on the value of a $100,000 investment after 30 years, after withdrawing the specified income from the account. *Ibbotson SBBI Classic Yearbook is a publication generally used by valuation professionals which provides a compilation of public data for stocks, bonds, bills and inflation. 59

60 Average Annual Income Hypothetical Performance Traditional Fixed Income, Insured Fixed Income, and Insured Equity Income have all taken turns at the top of the average annual income metric, with Traditional Equity Income significantly underperforming. Rank by Average Annual Income (Over 30 Year Periods Shown) Because of the purely hypothetical nature of the information presented based on certain assumptions, it does not represent any specific product; no client actually had, or could have had, the results and income characteristics shown for a specified period. This is based on historical data as described on the Assumptions page. Past performance is no guarantee of future results. 60

61 Standard Deviation of Annual Income Hypothetical Performance With zero standard deviation, Insured Fixed Income significantly outperformed other income classes. Rank by Standard Deviation of Annual Income (Over 30 Year Periods Shown) Because of the purely hypothetical nature of the information presented based on certain assumptions, it does not represent any specific product; no client actually had, or could have had, the results and income characteristics shown for a specified period. This is based on historical data as described on the Assumptions page. Past performance is no guarantee of future results. 61

62 Capital Growth Hypothetical Performance Traditional Equity Income significantly outperformed other income classes in terms of capital growth. Rank by Capital Growth (Over 30 Year Periods Shown) Because of the purely hypothetical nature of the information presented based on certain assumptions, it does not represent any specific product; no client actually had, or could have had, the results and income characteristics shown for a specified period. This is based on historical data as described on the Assumptions page. Past performance is no guarantee of future results. 62