21 st Century Retirees. ClienTell CE. Reasons for Working post- Retirement Stated Reasons for Working

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1 The Success Family of CE Companies Retirement Income Distribution in the 21 st Century Hour I Retiree Demographics, Retiree Preparedness, Retirement Planning, Retirement Plans, Regulatory Update 2 CE Credits (both hours) ClienTell CE 1 21 st Century Retirees A baby boomer turns age 60 every 7.5 seconds that s 7918 people per day for the next 19 years. Today, there are 78 million baby boomers, the first of which will reach age 65 in Their Number One Fear? Outliving their income 61%. By 2030, there will be twice as many people over age 65 than now. There are only 46 million Gen-ers Social Security, Medicare benefits in question 2 Reasons for Working post- Retirement Stated Reasons for Working To stay mentally active To stay physically active Ages Ages Ages percent 60 percent 66 percent 51 percent 50 percent 54 percent Financial Reasons 52 percent 43 percent To stay connected with other people Extra health insurance benefits Maintain identity & self-esteem Access to new challenges 49 percent 46 percent 39 percent 42 percent 43 percent 37 percent 38 percent 38 percent 39 percent 37 percent 36 percent 35 percent 35 percent Ages percent 54 percent 41 percent 43 percent 23 percent 34 percent 33 percent 3

2 What Affects Retirement Income? Future earnings Savings Returns on assets Retirement dates Life expectancy Pension incomes Government benefits (Social Security, Medicare) Life changes (illness, divorce, widowhood) 4 Retirement Preparedness Questions to Ask Targeted retirement date Life expectancy based on age and health Where they expect to get retirement income what size assets will produce it? Size of Social Security benefits? Pension? Other tax-deferred accounts? How are assets currently allocated? What changes will need to be made to produce income and continue growth? How will shortened time horizons affect the allocation? What life events could effect changes? What other risks threaten post-retirement lifestyle? 5 Age Effects of Retirement Age On Retirement Income Married Couple Earning $62,000 per Year Before Taxes* 80% Pre-ret. After-tax income *Source: Congressional Budget Office, November 2003 Annual Soc. Sec. Payments Additional Income Needed Assets required to cover deficit 62 39,154 17,735 21, , , ,279 19, , , ,958 18, , , ,770 16, , , ,591 14, , , ,517 12, , , ,593 10, , , ,832 8,322 94, , ,908 7,246 77,060 6

3 Whom Will This Affect? Distributors: Will need to provide advisors tools clients need including: Cash Management Tools Budgeting Tools Debt Management Tools Retirement Planning Tools Advisors: Will need to provide comprehensive, high level advice including: Creating client financial and net worth statements 5 steps: Information gathering; Establish objectives; Develop a financial plan; Implement the plan; Monitor plan Investment Product Manufacturers Insurance Product Manufacturers 7 Steps in Retirement Planning Information gathering Not just financial information; client dreams Establish objectives Realistic objectives; estate planning, philanthropic goals; retirement cost of living; proximity to family members for care receiving Develop a financial plan Rule of 72: Divide 72 by rate of interest = # of years to double $$ To compare investments: Divide # of holding years by # of years it takes to double $$ and compare Implement the plan Monitor the plan and revise when necessary 8 Seven Risks to Retirement Income #1: Spending at a level that depletes assets #2: Outliving assets #3: Inflation risk #4: Market risk in accumulation and distribution phases #5: Healthcare costs #6: Changes in government program policies #7: Unexpected event risk 9

4 Healthcare Costs Unexpected Life events Expected healthcare costs for uninsured retirees* Costs rose 7.7% in 2004 to 16% of GDP Predicted to rise to 20% of GDP by 2015 Premiums rose 7.7% in 2006 Unexpected illness or disability Divorce or loss of spouse Boomerang effect age 22 24: 60% live at home age 25 29: 30% live at home age 30 34: 25% live at home *Source: RIIA 10 Regulatory Environment NASD Suitability and Supervision Rules Rule 2310(a): Suitability; (b) Basis for Recommendation Rule 3010: Supervision Rule 2110: Standards of Trade Regulatory Scrutiny Regional Firms; Insurance Companies; Reputable Research Companies; Large Brokerage Firms; Mutual Fund Companies Legislative proposals NASD proposed rule for deferred variable annuity sales Other mutual fund bills HR 2420: Mutual Fund Integrity & Fee Transparency Act, 2004 S. 2059: Mutual Fund Reform Act, 2004 Industry Response NAVA & other organizations working to counter negative VA attention 11 Fiduciary Considerations History of ERISA General fiduciary guidelines Disclosure requirements Plan sponsor code of conduct based on Common Law of Trusts 1994 Uniform Prudent Investor Act Trustees must look at strategies from overall portfolio risk instead of individual security risk Pension Protection Act of 2006 Largest overhaul in 30 years Made Economic Growth and Tax Relief Reconciliation Act (EGTRRA) permanent Even greater disclosure and funding requirements for plans Stricter charitable giving rules Allows rollovers from qualified plans to Roth IRAs Licensing requirements for giving advice and designing asset allocations 12

5 The Success Family of CE Companies Retirement Income Distribution in the 21 st Century Hour Two RISKS RETIREES FACE, REGULATORY UPDATE, FIDUCIARY RESPONSIBILITY, THE RETIREMENT INCOME DISTRIBUTION CONSULTING PROCESS ClienTell CE 13 Defined Benefit Plans Defined Contribution Plans Defined Benefit Plans Promise specific benefit (can even be a specific dollar amount) Private plans no employee contributions; public plans? Yes. Employees not involved in investment decisions No benefit if employee leaves before retirement age Complex and difficult for employees to understand Defined Contribution Plans Examples include: 401(k), 403(b), 457, ESOPs, Profit Sharing Plans 14 Types of Defined Contribution Plans 401(k) plans Contribution Limits: $15,500 with catch-up provision of additional $5000 for over 50 Employers can impose their own limits; example 10% of gross income 47 million participants; $4 trillion in assets 403(b) plans and 457 plans What they are: equivalents to 401(k)s for 501(c)3s and state or agency educational organizations 457 Plans are 401(k) equivalents for government employees and non-profits not controlled by a religious organization 15

6 Individual Retirement Accounts A traditional or Roth IRA An IRA annuity A group IRA also called an Employer and Employee Association Trust Account A Simplified Employee Pension (SEP) A Savings Incentive Match Plan for Employees (SIMPLE IRA) A Spousal IRA can be a traditional or Roth IRA A Rollover IRA An Inherited IRA An Education IRA (the Coverdell Education Savings Account or ESA) Traditional IRAs Roth IRA 16 Other Plans and Distribution Options Profit-sharing Plans Employee Stock Ownership Plans Money Purchase Plans & Keogh Plans Hybrid Plans Distribution options Age limits for distribution Distributions for corporate plans can be postponed if employee is still working after age 70 ½. Distributions for Roth IRAs can be postponed regardless of employment status Allowable hardship distributions 17 Other Income Sources Working during retirement Government program benefits Personal savings and investments Cash Equivalents Stocks Bonds, taxable and non-taxable (municipal) Mutual Funds (Structured Distribution) Exchange Traded Funds (ETFs) Publicly/privately traded REITs Reverse Mortgages Alternative investments 18

7 Variable Annuities Combine insurance with investment vehicle May offer built-in asset allocation within sub-accounts Surrender charges for period of years on withdrawals above 10 percent Standard death benefit guarantees premium for heirs Other standard features: Nursing home waiver allows 100% contract withdrawal after required number of days Special illness benefit allows 25% contract withdrawal for heart disease, cancer, etc. Terminal illness allows 100% contract withdrawal Automatic rebalancing; Tax-free transfers between sub-accounts Systematic withdrawals; Earnings Sweep; Dollar cost averaging Automatic investment from checking accounts 19 Financial Personalities Achievers they re conservative and want to be in control. Entrepreneurs these are the workaholics, the overachievers. High rollers these are the thrill seekers who want power and recognition and enjoy taking risks. Hunters these are the highly educated, earn average to above average income, and have a strong work ethic but they are also impulsive spenders. Money Masters these are the wealth accumulators and they use money to provide contentment and security. Perfectionists have difficulty making decisions for fear of making a mistake. Producers have a high work ethic but don t usually have high incomes. Optimists to these investors, money means freedom. Safety Players these are the average income earners who prefer safer investments. 20 Income Stream Grid Lump Sum Monthly Quarterly Semi-annually Annually Taxation Soc. Sec. Benefits Tax free below thresholds Retirement plan benefits Rollover Partial withdrawal Ordinary income Cash Equivalents Ordinary Income Income-producing investments Taxable Bonds Ordinary income Municipal bonds Federally taxexempt Preferred Stock Ordinary income Common stock dividends (cash) Ordinary income Mutual Funds: Income and Balanced Capital gains or ordinary income ETFs (only from stock Ordinary income dividends paid out in cash) REITs Partial return of principal 21

8 Income Stream Grid, continued Mortgage-backed Securities Partial return of principal Reverse Mortgages Credit line accessible anytime Hedge funds Only when allowed by fund None Ordinary income Direct participation programs (DPPs) Income Strategies Partial return of principal and/or depreciation Scheduled stock or mutual fund sales Capital gains rate Laddered distributions Based on investment Annuity withdrawals Ordinary income Annuitization Ordinary income 22 Other Strategies Laddered bond portfolio Scheduled sales of concentrated positions Options Retirement Collars Rebalancing 23 Retirement Income Strategies Bill & Martha:* Age 65; $750,000 net worth $33,600 Soc. Sec. & company pension After tax income needed: $69,600 Mortgage: $14,400 Risk tolerance: moderate; Bequest motive: low Subjective survival probability: high Permanent life insurance on both: $175,000 Allocation: 30% Immediate Fixed Annuity; 26% Municipal bonds; 10% Immediate Variable Annuity; 34% Stocks, Mutual Funds, or Separately Managed Accounts Results: Continued growth with stocks or separately managed accounts to avoid running out of assets; immediate annuities provide income and use up assets; bonds offer income and offset tax liability *Case Study Source: Michael Henkel, president, Ibbotson Associates. Presentation at NAVA Retire with Confidence conference,

9 Retirement Income Strategies Ted & Alice:* Age 62; both work; $1 million net worth $40,000 income from Soc. Sec. benefit and IRAs After-tax income needed: $ 80,000; Mortgage: none; Risk tolerance: moderate to high; Bequest motive: high; Subjective survival probability: high; Permanent life insurance: $250,000 Allocation 50% Separately Managed Account; 25% Variable or Index Annuity; 25% Non-traded REIT or Other Non-correlated Income Producing Asset Results: - Separately Managed Account allows tax harvesting - Variable or Index Annuity has living benefit rider with 5% compounding and a 5% GMWB - REIT (or other non-correlated income producing asset) provides noncorrelated risk management & partially taxable income *Source: J. William Bill Cooley, PE, MBA, RIA 25 Continuing Education that REALLY Makes a Difference A Division of the Success Family of CE Companies J. William Bill Cooley, President/CEO 2 Corporate Plaza Drive, Suite 100 Newport Beach, CA