Retirement Income Strategies

Transcription

1 Retirement Income Strategies Photo collage Taking steps toward planning a fit retirement FINANCIAL LITERACY EDUCATION PROGRAMS [Name of presenter] [Title of presenter]

2 Agenda 1 The new retirement realities 2 The major risks to retirement income 3 Essential income planning 4 Where to go from here? 2

3 The new retirement realities

4 The new retirement realities How confident are you about your retirement? 28% 21% Very confident in having enough money for retirement Very confident in having prepared well financially for retirement Source: The 2016 Retirement Confidence Survey: Worker Confidence Stable, Retiree Confidence Continues to Increase. EBRI, Issue Brief No. 422, March

5 The new retirement realities Possible challenges Higher personal debt Greater responsibility to save Longer life expectancy Concern for the future of Social Security 5

6 Major risks to retirement income

7 Major risks to retirement income The five major risks to retirement Longevity Healthcare Investment Inflation Withdrawal 7

8 Major risks to retirement income 1. Longevity risk Risk of outliving your retirement savings 66, % 2 43% 3 Number of centenarians in the U.S. Percent of centenarians that live in the city Percent of workers age 50+ concerned about outliving their savings Sources: 1 Annual Estimates of the Resident Population by Single Year of Age and Sex for the United States: April 1, 2010 to July 1, U.S. Census Bureau, Population Division. Release Date: June Centenarians: U.S. Census Report. 3 The Current State of Retirement: Pre-Retiree Expectations and Retiree Realities. Transamerica Center for Retirement Studies. December

9 Major risks to retirement income Managing longevity risk Reduce living expenses; save more Develop a strategic investment allocation Work longer; retire later 9

10 Major risks to retirement income 2. Healthcare risk The high cost of healthcare in retirement $259,000 Median amount a retired couple needs for a 90% chance of covering their healthcare expenses in retirement Source: Amount of Savings Needed for Health Expenses for People Eligible for Medicare: Some News Not So Rare Anymore. Monthly Newsletter. Vol. 36, No. 10. EBRI. October

11 Major risks to retirement income The cost of long-term care $120,000 $100,000 $80,000 Median annual cost 2016 Inflation estimated in 2020 $92,432 $82,125 $103,972 $92,378 $60,000 $40,000 $49,004 $46,332 $52,147 $43,539 $20,000 $17,680$19,899 $0 Adult Day Care Assisted Living Home Health Nursing Home (Semi Private) Nursing Home (Private) This chart shows the median annual cost for long-term care across the United States in 2016 at different centers of care and the five-year average annual cost at an assumed 3% inflation rate. Sources: Cost of Long Term Care Survey, Genworth Financial,

12 Major risks to retirement income Options to pay for healthcare Medicare and Medicaid Medicare Features Medical coverage for people on Social Security Federally managed Does not pay for long-term care services Medicaid Medical care for those living in poverty State managed Pays for long-term care, if certain conditions are met Eligibility requirements Age 65 or older Under 65 with certain disabilities Any age with permanent kidney failure requiring dialysis or transplant U.S. citizen Senior, disabled or blind and resident of state Unable to perform two activities of daily living Financially impoverished Source: Medicare & You. Centers for Medicare & Medicaid Services,

13 Major risks to retirement income Options to pay for healthcare Long-term care insurance 1 Works in conjunction with Medicare Activities of Daily Living used to assess disability and insurability 2 3 Covers skilled care, custodial care and cognitive impairments Cost and coverage vary by age 4 5 Cannot be cancelled or not renewed Consider adding inflation protection rider

14 Major risks to retirement income Options to pay for healthcare Self-insuring Monthly savings needed Future cost for 2.5 years of long-term care $1,771 $273, years $906 $367, years $606 $493, years The chart assumes continuous monthly contributions with an average annual rate of return of 5%, annual nursing home care cost of $82,100 in 2016 and an inflation rate of 3% for semi-private nursing home care. This chart is hypothetical and only an example. In 14

15 Major risks to retirement income 3. Investment risk Risk that actual investment return could be different than expected Theoretical risk versus return Asset classes and indexes from which their historical returns are derived are not managed funds, have no identifiable objectives and cannot be purchased. They do not provide an indicator of how individual investments performed in the past or how they will perform in the future. Performance of indexes does not reflect the deduction of any fees and charges and past performance of asset classes does not guarantee the future performance of any investment. 15

16 Major risks to retirement income Investment considerations Expectations Investor profile Risk tolerance Time horizon How will the income from the investment be used? How much will you need? When will you need it? What is your risk tolerance? When will you need the money? Emotional temperament Current financial status Time horizon Prior investment experience How long before you retire? Short-term: capital preservation Long-term: capital appreciation 16

17 Major risks to retirement income Asset allocation Conservative Aggressive Cash 10% Stock funds 20% Cash 10% Bond funds 10% Bond funds 70% Stock funds 80% Higher potential returns generally involve greater risk and short-term volatility is not uncommon when investing in various types of funds, including but not limited to sector funds, emerging market funds and small- and mid-cap funds. Risks for emerging markets include, for instance, risks relating to the relatively smaller size and reduced liquidity of these markets, high inflation rates and adverse political developments. Risks for smaller companies include business risks, significant stock price fluctuations and reduced liquidity. Investing in higher yielding, lower rated bonds has a greater risk of price fluctuation and loss of principal and income than U.S. government securities such as U.S. Treasury bonds and bills. Treasuries are guaranteed by the government for repayment of principal and interest if held to maturity. Investors should carefully assess the risks associated with an investment in the fund. Government securities are guaranteed by the timely payment of principal and interest if held to maturity. Fund shares are not insured and are not backed by the U.S. government and their value and yield will vary with market conditions. Neither asset allocation nor diversification ensure a profit or protect against market loss. 17

18 Major risks to retirement income Diversification Mutual funds: Allow for asset allocation and diversification Growth funds, income funds, index funds, sector funds Stock funds (equity funds) Bond funds (fixed funds) Corporate funds, high-yield (junk bond) funds, international/global funds, treasury funds Money market funds Invest in high-quality, short-term debt [e.g., U.S. Treasury bills, certificates of deposit (CDs)] Source: The Three General Types of Mutual Funds. About.com. Retrieved June

19 Major risks to retirement income Annuities An option to turn assets into income you ll never outlive Contract with an insurance company Receive income payments at regular intervals Long-term investment for future retirement income Payment and earnings grow tax deferred Income for life and to beneficiaries after your death Guarantees are backed by the issuing insurance company s claims-paying ability 19

20 Major risks to retirement income Worried about market downturns? Consider an annuity with a lifetime guaranteed minimum withdrawal benefit (GMWB) 1 Purchased to ensure payments never fall below the amount guaranteed by your contract 2 Contract terms, payout options, fees and investment/age restrictions vary 3 Features may include lifetime income at a set annual percentage 4 If your account value increased in a bull market, you would not need to use the rider Withdrawals in excess of permitted free amounts may be subject to early withdrawal charges. Withdrawals are also subject to taxation as ordinary income. Guarantees are backed by the claims-paying ability of the issuing insurance company. 20

21 Major risks to retirement income Case study Mary purchases an annuity that offers lifetime payouts and a 4% GMWB. She: Makes a single payment of $100,000 Invests 70% in stocks and 30% in bonds Withdraws 4%, which is $4,000, per year? What if a recession drives down the value of her investment? She continues to withdraw her $4,000 per year for the rest of her life, even if the value of her account drops to $0.? What if a bull market increases the value of her investments? She does not need to use the rider she purchased. She continues to withdraw at least $4,000 per year, and her account value increases to reflect market gains according to the terms of the annuity. Not an actual case and is a hypothetical representation for illustrative purposes only. 21

22 Major risks to retirement income 4. Inflation risk Risk of losing purchasing power due to increase in costs of goods and services per loaf per loaf per loaf $1.42 per loaf inflation has risen 3% annually since Sources: 1 Average Price Data. Consumer Price Index, Bureau of Labor Statistics. January Consumer Price Index Data from 1913 to Bureau of Labor Statistics, Consumer Price Index. November 17,

23 Major risks to retirement income Managing the risk of inflation Use a financial plan Consider investments that help keep pace with inflation Revisit your asset allocation every year Develop a spending strategy Set aside a cash cushion Ask for professional advice 23

24 Major risks to retirement income 5. Withdrawal risk Risk of drawing down your assets too aggressively to meet spending needs Lump-sum withdrawals 20% immediate withholding Ordinary income taxes 10% federal early withdrawal tax penalty, if under age 59½* Systematic withdrawals Payments at regular intervals Ordinary income taxes 10% federal early withdrawal tax penalty, if under age 59½* Annuitization Periodic payments, irrevocable Ordinary income taxes 10% federal early withdrawal tax penalty, if under age 59½* *The 10% federal early withdrawal tax penalty does not apply to 457(b) plans. Rollover Direct: No income taxes, penalties or 20% employer tax withholding Indirect: 20% withholding Must roll over cash, plus 20%, within 60 days If over 60 days, income taxes and 10% federal early withdrawal tax penalty apply (if under age 59½*) 24

25 Major risks to retirement income Lump-sum distribution Lump-sum amount $200,000 Withholding, 20% -$40,000 Additional income tax, 8% -$16,000 Federal tax penalty, 10% (for early withdrawal if under age 59½) -$20,000 Total tax -$76,000 Total distribution $124,000 Assumes a 28% tax bracket. 25

26 Major risks to retirement income Systematic withdrawals Sequence of returns matter Investor A Investor B Source: MFS research. This hypothetical example is for illustrative purposes only and is not intended to predict the returns of any investment choices. Rates of return will vary over time, particularly for long-term investments. There is no guarantee the selected rate of return can be achieved. The performance of the investments will fluctuate with market conditions. Also, note that this example does not take into account other potential sources of retirement income, such as Social Security, corporate pensions, etc. Keep in mind that all investments carry a certain amount of risk including possible loss of the principal amount invested. 26

27 Essential income planning

28 Essential income planning Sources of retirement income Earnings Social Security Employer Sponsored Retirement Plan Asset income/other Please note that this is just one scenario and the sources of retirement income will vary depending on your individual situation. Source: Income of the Aged Population, Shares of Aggregate Income by Source, 1962 and Fast Facts and Figures About Social Security, SSA Publication No Released August

29 Essential income planning Historical average annual Social Security benefits $14,160 $16,092 $10,135 $273 $981 $3, Access the SSA s Online Retirement Estimator tool to estimate your retirement benefits: Sources: (Years ). Average Monthly Social Security Benefits (calculated to provide annual total), Social Security Bulletin: Annual Statistical Supplement. SocialSecurity.gov. (Year 2016) Social Security Changes, Fact Sheet and 2016 Social Security Changes, Fact Sheet. ssa.gov. 29

30 Essential income planning Essential income planning 3 Legacy Life insurance, plan wills, trusts 2 Discretionary lifestyle expenses Travel, leisure, hobbies Variable income Personal savings, Investments, post-retirement income Essential lifestyle expenses Food, shelter, clothing, transportation, healthcare 1 Income designed to last a lifetime Social Security, pension, GMWB Annual income needs Funding sources 30

31 Essential income planning Case study Dave and Julia: Seeking income for life Income and expenses Monthly combined income (pensions and Social Security) $ 5,600 Monthly essential expenses $ 6,000 Monthly income gap $ 400 Dave 64 years old Savings and investments Dave s 401(k): $500,000 Julia s 403(b): $300,000 IRAs: $ 75,000 CDs $ 25,000 Retirement nest egg $900,000 Julia 62 years old 31

32 Essential income planning An annuity with a lifetime guaranteed minimum withdrawal could fill the income gap $2,650 Pensions Essential expenses of $6,000 monthly $2,950 Social Security $5,600 monthly income $100,000 annuity purchase $800,000 $400 monthly shortfall Monthly lifetime income Retirement savings This hypothetical example is for illustrative purposes only. Annuity costs, fees, payouts, limitations and restrictions vary according to contract terms. Guarantees are backed by the claims-paying ability of the issuing insurance company. 32

33 Essential income planning The key is to have a strategy for life How much money will you need in retirement? How much money will you receive from your pension and Social Security? How much will be available in your tax-deferred plans and in other personal investments? Do you have a shortfall that you will need to make up? 33

34 Where to go from here?

35 Where to go from here? Consider your expectations for retirement Will you continue to work? How is your health? Is there a history/expectation of longevity? Do you have a plan that guarantees your essential income needs will be met?? 35

36 Where to go from here? Work with VALIC Financial Advisors, Inc. (VFA) Prioritize your investment goals Determine the time horizon needed to achieve your goals Determine a financial strategy to help meet your goals For more than half a century, VALIC has helped Americans plan for and enjoy a more secure financial future 36

37 Where to go from here? Benefits of financial planning Provides a big picture view of your current financial situation Helps identify your financial goals and objectives Allows you to understand the impact of your decisions Helps ensure your goals stay on track, if reviewed regularly Offers you a course of action needed to achieve your financial goals 37

38 Where to go from here? Financial 360 Plan Provides a customized analysis of your financial situation 38

39 Where to go from here? Financial 360 Plan - retirement summary sample plan This table assumes a hypothetical 4.5% rate of growth on investments (based on the geometric mean rate of return of your current portfolio). 1 Estimates of pension values are only an approximation of the future amount(s) you may receive, and many things can affect the accuracy of the estimate, such as pensionable earnings, interest rates and plan changes, among others. 2 This report approximates taxes by applying the effective tax rate furnished by the client to payments that are received from tax-deferred accounts as well as to any other taxable income. The taxes column also includes estimated capital gains taxes on any equity nonretirement assets withdrawn. Taxes on the growth of non-retirement assets are not included in this column. Instead, the effect of taxes on the amounts shown in the Non-retirement balances column is estimated by using an after-tax rate of return to grow taxable investments. 39

40 Where to go from here? Evaluation 40

41 This information is general in nature, may be subject to change, and does not constitute legal, tax or accounting advice from any company, its employees, financial professionals or other representatives. Applicable laws and regulations are complex and subject to change. Any tax statements in this material are not intended to suggest the avoidance of U.S. federal, state or local tax penalties. For advice concerning your individual circumstances, consult a professional attorney, tax advisor or accountant. Securities and investment advisory services offered through VALIC Financial Advisors, Inc. ( VFA ), member FINRA, SIPC and an SEC-registered investment advisor. VFA registered representatives offer securities and other products under retirement plans and IRAs, and to clients outside of such arrangements. Annuities issued by The Variable Annuity Life Insurance Company ( VALIC ). Variable annuities distributed by its affiliate, AIG Capital Services, Inc. ( ACS ), member FINRA. VALIC, VFA and ACS are members of American International Group, Inc. ( AIG ). AIG is a leading international insurance organization serving customers in more than 100 countries and jurisdictions. AIG companies serve commercial, institutional, and individual customers through one of the most extensive worldwide property-casualty networks of any insurer. In addition, AIG companies are leading providers of life insurance and retirement services in the United States. All products and services are written or provided by subsidiaries or affiliates of AIG. Non-insurance products and services may be provided by independent third parties. AIG common stock is listed on the New York Stock Exchange and the Tokyo Stock Exchange. Copyright The Variable Annuity Life Insurance Company. All rights reserved. VALIC.com VC (01/2017) J EE

42 Retirement Income Strategies Photo collage FINANCIAL LITERACY EDUCATION PROGRAMS Thank you!