Jamie Hopkins, Esq., JD, MBA, LLM, RICP Co-Director of the New York Life Center for Retirement Income Associate Professor of Taxation

Transcription

1 Jamie Hopkins, Esq., JD, MBA, LLM, RICP Co-Director of the New York Life Center for Retirement Income Associate Professor of Taxation

2 Our Discussion The American College of Financial Services NYL Center For Retirement Income RICP Designation The Financial Services Industry Industry Players Compensation Models Trends What is Retirement Income Planning? 10 Step Retirement Income Planning Learning the Language Retirement Income Strategies Longevity Sequence of Returns Risk Social Security Planning Tax Efficiency Planning (Roth IRAs)

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4 Leadership Jamie Hopkins, Esq, LLM, RICP Dave Littell, JD, ChFC, CFP Mission: Co-Director of NYLCRI Professor of Taxation Co-Director of NYLCRI Professor of Taxation Elevate the retirement-income planning knowledge of financial services professionals in order to improve retirement security for all Americans Current Priorities & Initiatives: Free Video Library Retirement Income Certified Professional (RICP ) RICP Retirement Income Literacy Index Continued Research Projects Thought Leadership and Visibility

5 Free Just in Time Video Content On ü Making Retirement Income Last a Lifetime ü Using Annuities in Retirement Planning ü When to Start Social Security Benefits ü How Much to Save for Retirement ü Tax Strategies for Retirement Plan Withdrawals ü Health and Long-Term Care Strategies

6 Retirement Income Certified Professional (RICP ) Practical. Current. Comprehensive.

7 3 Course Education Program on Retirement Income Planning Self-Study and Webinars 10,000+ Advisors Enrolled

8 Educators Franklin Hegna Jordon Rappaport Timmermann Researchers Ameriks Babbel Basu Blanchett Finke Milevsky Pfau Reichenstein Sass Vanderhei Warshawsky Software Freitag Malholtra Meyer Pechter Huxley Practitioner Experts Baldwin Caudill Cloake Kitces Guyton Newman Schiff Rosen

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11 Financial Services What do you need to know?

12 What makes up the industry? Asset Management $40 Trillion 300% of US GDP Insurance Premiums $1.3 Billion/YR Close to 50/50 for Life v. P&C Banking Venture Capital Alternative Investments Real Estate

13 Conferences The American College Knowledge Summit Every 2 years 2,000+ Financial Advisors InvestmentNews Retirement Income Summit FPA Financial Planning Association SFSPs - Society LIMRA/LOMA Society of Actuaries IRI Insured Retirement Institute

14 Compensation Fee-Only Commission Only Commission and fees (Hybrid) Salary and Bonus

15 Current Trends Retirement Income Planning 10,000 Baby Boomers hit 65 each day until 2030!!! 75 Million Baby Boomers this is where market is Fiduciary Status - ERISA DOL Fiduciary Expansion Disruptive for industry Compensation & Offerings Focus on IRAs comprehensive planning

16 Retirement Income Planning

17 What is Retirement Income Planning? Meeting client s financial goals Income needs Contingent expenses Legacy goals Address retirement risks Longevity Risk Long-Term Care Risk Sequence of Withdrawal risk Public Policy Risk

18 Learning The Language NUA Sequence of Returns Risk Roth Conversions 72(t) Penalty tax Safe Withdrawal Rate RMDs

19 Gift Card Question - NUA What is NUA? How could home equity/reverse mortgage be involved?

20 Gift Card Question Safe Withdrawal Based on historical performance in the U.S., how much can you safely withdrawal each year for 30 years, adjusted for inflation, from $1,000,000 invested 50/50 in stocks and bonds without running out of money?

21 Retirement Income Process 1. Evaluate the client s current situation 2. Identify and prioritize retirement goals 3. Estimate retirement income needs 4. Identify sources of income and assets available to generate retirement income 5. Make a preliminary calculation of the client s preparedness for retirement 6. Develop strategies for addressing a shortfall 7. Consider legal and tax issues that can derail plan 8. Consider retirement risks in developing solutions 9. Determine an appropriate strategy for converting assets into income 10. Integrate all considerations, present alternatives, and agree upon a plan

22 Impact of Good Advice (Decisions) Strategies Increase in income* Social Security Claiming 9.0% Dynamic Withdrawal Strategy 8.5% Tax Efficiency 8.2% Total Wealth Asset Allocation 6.1% Annuity Allocation 3.8% Liability Relative Optimization 2.2% Total 38% *Blanchett, video discussing article Alpha, Beta and now Gamma

23 Risks to Address 1. Longevity Risk 2. Inflation Risk 3. Excess Withdrawal Risk 4. Health Expense Risk 5. Long-Term Care Risk 6. Frailty Risk 7. Elder Abuse Risk 8. Market Risk 9. Interest Rate Risk 10. Liquidity 11. Sequence of Returns Risk 12. Forced Retirement Risk 13. Reemployment Risk 14. Employer Insolvency Risk 15. Loss of Spouse Risk 16. Unexpected Financial Responsibility Risk 17. Timing Risk 18. Public Policy Risk

24 Four Focal Point Retirement Risks 1. Longevity Risk 2. Sequence of Returns Risk 3. Public Policy Risk 4. Tax Efficiency

25 Longevity Risk

26 Longevity Risk No one can predict how long he will live. This complicates planning since a retiree has to secure an adequate stream of income for an unpredictable length of time.

27 Understanding Longevity Risk Average Life Expectancy Social Security Age 84 males Age 86 females 1 in 4 will live past age 90 1 in 10 will live past 95 Clients underestimate their life expectancies Exacerbates many other risks!

28 Solutions How to deal with longevity risk Defer Social Security Elect life annuity options from 401k Purchase a life annuity Purchase a deferred income annuity Take lower withdrawals from accounts HECM Contingency Fund Roth IRAs

29 Sequence of Returns Risk

30 Sequence of Returns Risk Investment returns are variable and unpredictable. The order of returns has an impact on the how long a portfolio will last if the portfolio is in the distribution stage and if a fixed amount is being withdrawn from the portfolio. Negative returns in the first few years of retirement can significantly add to the possibility of portfolio ruin.

31 Facts Sequence of returns risk is tied in part to portfolio volatility. Reducing volatility in the retirement portfolio reduces sequence of return risk. 4% Safe withdrawal rate Is it still safe in today s low interest rate environment?

32 Good Returns First Example Peggy gets an average rate of return of 0% Starts with $10,000 wants $1,100 a year 5 years: 40%, 20%, 0%, 20%, 40% $12,900 at end of year 1 $14,380 at end of year 2 $13,280 at end of year 3 $9,524 at end of year 4 $4,614 at end of year 5

33 Example With Bad Returns First Joe gets an average rate of return of 0% Starts with $10,000 wants $1,100 a year 5 years: 40%, 20%, 0%, 20%, 40% $4900 at end of year 1 $2820 at end of year 2 $1720 at end of year 3 $ 964 at end of year 4 $ 249 at end of year 5 (Peggy had $4,614 )

34 Comparison Peggy v. Joe Both had average 0% returns Joe s bad returns were first Only had $249 after 5 years of spending $5,500 Peggy had $4,614, after spending $5,550 All because her bad returns were later

35 Solutions to Sequence of Returns Risk Diversified income sources Find income that is uncorrelated with the market Annuities flooring strategies Bonds/CDs can we meet our needs? Keep Working? Drop equities down when hearing retirement!

36 Home Equity Solutions Downsize (reduce expenses and withdrawals) Home-sharing Sale-Leaseback Reverse Mortgage

37 Equity and Non-equity Assets for Average Married Couple 32% 68% Source: U.S. Census Bureau, Survey of Income and Program Participation, 2008 Panel, Wave 10

38 Home Equity Income Options Age in Place Downsize Sale-Leaseback Relocate Live with family Sale CCRC Home Sharing Special Purpose Loan Traditional Line of Credit or Home Equity Loan Reverse Mortgage

39 So What's The Issue Average age is 71 Historically used poorly new rules can help Home equity has not been part of the income discussion Lots of misunderstandings Compliance issues abundant

40 Reverse Mortgages The Swiss Army Knife of Retirement Income Multiple ways to strategically use home equity to improve a client s retirement income situation

41 Strategic Use Sequence of Returns Risk 4% Safe Withdrawal Rule might get average 8% returns but can only withdrawal 4% We don t care about this until we withdrawal money Its just bad luck - Home Equity can protect portfolio Line of Credit use when market drops! Use Home Equity Early in Retirement!!!

42 Use Home Equity Early in Retirement!!!

43 When should I use home equity?

44 Use Home Equity Early in Retirement!!!

45 Public Policy Risk

46 Public Policy Risk An unanticipated change in government policy with regard to tax law and government programs such as Medicare and/or Social Security can have a negative impact on retirement security.

47 Importance of Social Security 2/3 of retirees get more than 50% of income from Social Security 1/3 of retirees its almost everything! Defer and a higher percentage of income replaced by Social Security

48 Gift Card Question Deferral Credits If you defer Social Security benefits from 67 until 68, you get a deferral credit of.

49 Benefit of Deferring Social Security Deferring past age 62 results in a 7-8% increase for each year of deferral Benefit at 70 is 176% of benefit at age 62 A couple s largest benefit is payable for a joint life time

50 Effect on a Retirement Income Plan Helps meet primary goal of meeting income needs Builds a bigger income floor with a low-risk investment Benefits payable for life addressing longevity risk Benefits receive COLA addressing inflation risk Regular payments addresses excess withdrawal risk Couple deferring larger benefit addressing loss of spouse risk Retirees with greater amounts of guaranteed income are more satisfied, worry less, and show fewer signs of depression

51 Trends in Claiming Behavior Sex/Birth Cohort Claim at 62 Claim at Claim at 65+ Male % 23.1% 21.5% Male % 16.4% 37.1% Female % 18.3% 24.9% Female % 17.2% 33.8% SOCIAL SECURITY CLAIMING: TRENDS AND BUSINESS CYCLE EFFECTS Owen Haaga and Richard W. Johnson: Center for Retirement Research WP

52 Maximum Benefit 2015 $2,025 a month ($24,300 a year) at 62 $2,663 ($31,956 a year) at age 66 $3,501 a month ($42,012 a year) at 70 Couple both earning maximum benefit Age 62 $48,600 Age 66 $63,912 Age 70 $84,024

53 Social Security 2016 Changes Removal of Aggressive Claiming Strategies File-and-Suspend (Pre-2016 Bipartisan Budget Act) When you turn your FRA (66 today) you could voluntarily suspend your benefits Why File-and-Suspend 1. File for Retroactive Benefits 2. Trigger Spousal Benefits 3. Start-Stop-Start Strategy

54 What Changed for Deemed Filing? For anyone born 1954, January 2 or later Deemed filing extended to age 70 What does this mean? It means you Cannot Pick between the higher of your spousal or workers benefit at FRA You always are deemed to have filed for all benefits that you are eligible for when you file. You will get the higher payment of the two!

55 What about File and Suspend Must file and suspend before May 1, 2016 Means you need to be born on May 1, 1960 or earlier be 66 on April 30 th If you file and suspend before then, you can still take advantage of the three strategies trigger, retroactive, stop-start If not, you can no longer trigger benefits for a family member or for retroactive

56 Start-Stop-Start Strategy Remains If you claimed benefits at 62, and want to change your mind You have to wait until FRA Can voluntarily suspend benefits Will be reduced but not get 8% per year

57 Example Start at 62, FRA was 66 PIA was $2,000 Reduced by 25% Received $1,500 at 62 until 66 At 66, can voluntarily file and suspend don t get payments Do get 8% increase per year Multiply $1,500 by 132% increase Back at $1,980 (almost got all benefits back)

58 Lost Benefits Couple could have lost Present Value of nearly $50,000 A divorced spouse could lose even more if they have to claim their worker s benefits early! Again can we get a diversified income stream from Home Equity

59 Social Security Planning Singles Focus on annuity value Take early if life expectancy is short Defer if life expectancy exceeds age 80 Married couples Maximize the larger worker s benefit as that pays for the joint life expectancy Take advantage of other benefits Use a software program

60 Tax Efficiency

61 Gift Card Question S.S. How much of your S.S. benefits could be subject to taxation? A. 0% B. 10% C. 20% D. 40% E. 85% F. 100%

62 Tax Efficiency 1. Taxation of S.S. Benefits 2. Required Minimum Distributions 70 ½ 3. Roth IRA Conversions

63 Roth Conversion

64 Tax Efficiency Roth IRAs and Conversions are underutilized Early years of retirement a good time to convert Why? Taxable income is down Mixing in some income from HECM non-taxable Allows for conversions and stay within tax bracket Can act as a giant contribution to a Roth move money from Home tax free into a Roth IRA Could help avoid taxes on 85% of S.S. Benefits

65 Roth Conversion Example 25% Tax Rate $1,000,000 IRA, $500,000 Investments and $500,000 house $1,000,000 in IRA = $750,000 of Roth IRA Take Reverse Mortgage doesn t increase tax rate Have $250,000 from $500,000 House Pay taxes over a few years with multiple conversions to keep Tax Rate at 25% - have $1,000,000 in Roth = $1,333,333 in a IRA $250,000 House, $500,000 Inv. Total net worth now up 83,000 without doing anything higher return asset with no future taxation of S.S.

66 Why would I move my assets from house to Roth? Housing is a bad investment! It is good for buying housing services Historically its an inflation adjusted asset no additional gains Can take money from equity which will hold steady and put it in a higher earning investment could go bonds if you want to keep household risk level the same Can also replace existing mortgage outflow with reverse mortgage to cut costs

67 Why RMs Work So well With Roth Conversions Reverse Mortgages can help pay taxes Can also help us convert at a low tax rate by providing non-taxable income source The Conversion is good because we have taxfree money that can grow faster not impact S.S. or Medicare premiums

68 Moving Forward 1. Get Educated! - Learn about RI planning and financial services 2. Get Involved! -Conferences, talk to individual planners, do RM presentations 3. Stay Current Follow the DOL changes, product developments, research 4. Positive Press - Help Create Positive RM Stories for Good Press and Public Awareness

69 Additional Resources Forbes e-book

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