Retirement Income Plans

Transcription

1 Retirement Income Plans Focus on the plan not the portfolio Henry Kielar, CA CFP Senior Consultant, Investments

2 Agenda Background Trends Demographics Economy and Markets Product Allocation Three Retirement Planning Stages Retirement Income Plans Expenses Defined Creating an Inflation Protected Pension Cash Wedge Review of the Signature Series Seg Funds 2

3 Background Trends 3

4 Canada s Demographic Reality 500 Births in Thousands The Baby Boom Tax payers supporting retired Baby Boomers

5 LIMRA Issues Facing Baby Boomers Less likely to be in a pension plan (24% in 2003) Need to plan for longer and more active retirement - needs more cash 84% do not have a formal plan for converting savings to income (68% for current retirees) "they need advice from a knowledgeable professional more than at any other time in their life" 5

6 Issues Facing Retirees Longevity Not running out of money Estate Having money left for the children or for a charity Inflation Not being poor in retirement Taxes Paying too much taxes Health Being able to afford great medical support Living in retirement with dignity Enjoying retirement How do your retirees rank these? Do these priorities change? Are they different for spouses? 6

7 Issues Facing Retirees 7

8 Markets 2008 Markets 2008 Extreme market volatility and declining portfolio values trends that are most on the minds of financial advisors and their clients this year point to the conclusion that 2008 has been a bad year for retirement economics. - Peter Drake (The Economics of Retirement, Advisor.ca, January 02, 2009) 8

9 Three Retirement Planning Stages Stage 1 Accumulation Stage 2 Transition (R-5) Stage 3 Retirement

10 Options for Retiring Clients 1. Do nothing 2. Move the timeline out 3. Contribute more money 4. Take on more risk 5. Decrease expectations 6. Leverage product allocation 10

11 In Retirement Once the retiree begins to mine the nest egg for retirement income, conventional asset allocation can no longer be viewed as the core strategy for achieving retirement sustainability. In contrast, the concept that will allow retirees to hedge against adverse outcomes of retirement risk variables and aid them in reaching their retirement income and estate goals will be product allocation. Moshe Milevsky (Who is Income Wealthier, Moshe Milevsky with Anna Abaimova) 11

12 Retirement Income Plans 12

13 Defining Expenses Lots of debate around what is an acceptable percentage to use for projecting retirement expenses as compared to gross pre-retirement income. What is right 60%, 70%, 85% or even 110% 13

14 Defining Expenses (cnt d) Help clients define Fixed Expenses and Discretionary Expenses. 1. Fixed Expenses Are those which clients cannot easily change or eliminate and which are necessary recurring expenses as determined by the client (For example, basic living expenses food, clothes, keeping the lights on, but what about the annual trip to Florida) 2. Discretionary Expenses Are those that a client can do without and which can often change in amount in any given year. 14

15 Fixed Expenses Create an inflation protected pension for fixed expenses. Step 1: Determine your client s fixed expenses in today s dollar. Step 2: Identify all sources of inflation protected fixed payments. Step 3: Determine the amount needed to fix the gap. Step 4: Purchase an inflation protected annuity for the appropriate amount. 15

16 Fixed Expenses Example: 65 year old couple looking to retire Step 1: Determine your client s fixed expenses in today s dollar. $30,000 to pay for keeping the lights on, food on the table and a roof over their head Step 2: Identify all sources of inflation protected fixed payments. $15,000 OAS/CPP $4,000 pension from an RPP Step 3: Determine the amount needed to fix the gap. $11,000 gap Step 4: Purchase an inflation protected annuity for the appropriate amount. $250,000 to purchase an $11,000 joint inflation protected annuity 16

17 Fixed Expenses Create an inflation protected pension for fixed expenses. Inflation Protected Pension for Fixed Expenses Payments $40, $35, $30, $25, $20, $15, $10, $5, $ Years 17

18 Fixed Expenses Should your client pay for inflation protection Roll the Dice on Inflation $45, $40, $35, Payments $30, $25, $20, $15, $10, $5, $ Years No Inflation With A Slow Start To Inflation 18

19 Fixed Expenses Or should your client pay the price for not protecting Roll the Dice on Inflation $45, $40, $35, Payments $30, $25, $20, $15, $10, $5, $ Years No Inflation With A Strong Start To Inflation 19

20 Discretionary Expenses INVESTMENT MATH - Accumulation Phase: Scenario Return Balance % $196, % $196, % $196,715 A few bad years can be offset over the long term 20

21 Discretionary Expenses Disbursement Phase (withdrawing $7,000/year) Scenario Return Balance % $100, % $112, % $83,586 A few bad years at onset of retirement + withdrawals could be disastrous 21

22 Discretionary Expenses Employ the Cash Wedge as an income delivery process: 1. Allocate capital to cash or cash-like funds such as Money Market (1 to 3 years income) to create a Cash Wedge 2. How many years of income is allocated to Money Market is determined by client s risk tolerance 3. Allocate the remaining funds as per risk profile 4. Draw income payments from the Cash Wedge 22

23 Discretionary Expenses The overall objective of this strategy: Avoid permanently destroying capital by selling market-based securities at the wrong time! 23

24 Discretionary Expenses Example: Couple age 65 is looking for discretionary income of $20,000 per year Capital invested $300,000 Moderate risk tolerance Initial Asset Allocation: 13% Money Market Fund (SLMF or Ideal Segregated Fund) 65% Monthly Income Fund (SLMF or Ideal Segregated Fund) 22% Global Dividend Growth Fund (SLMF or Ideal Segregated Fund) 24

25 Discretionary Expenses Cash Wedge = about 2 yrs income 25

26 Discretionary Expenses Based on client s moderate risk profile and minimum income requirements 13% allocation to Money Market will cover approximately 2 years of income Each year profits and/or distributions will be taken to replenish the Cash Wedge Pick funds that generate predictable and reliable cash flows such as our Monthly Income Fund. 26

27 Retirement Income Plan Cash Wedge For Discretionary Expenses Inflation Protected Pension for Fixed Expenses Inflation Protected Pension For Fixed Expenses Payments Years 27

28 The Transition Stage Stage 1 Accumulation Stage 2 Transition (R-5) Stage 3 Retirement

29 The Transition Stage Fixed Expenses Capital for FE - Invest in a Term Fund $300,000 $250,000 $200,000 $150,000 Capital for FE $100,000 $50,000 $- R Need $250,000 to buy the Inflation Protected Pension Invest $200,000+ in a Fixed Income product for 5 Years so that in 5 years, you are guaranteed to have the required assets to purchase the annuity 29

30 The Transition Stage Discretionary Expenses Cash Wedge R-5 Standard Life Global Div Growth Fund (24.5%) Standard Life Money Market (2%) Cash Wedge Approaching Retirement Standard Life Global DivGrowth Fund (23%) Standard Life Monthly Income Fund (73.5%) Standard Life Money Market (7%) Cash Wedge Retirement Standard Life MonthlyIncome Standard Life Fund Global (70%) DivGrowth Fund (22%) Standard Life Money Market (13%) Standard Life Monthly Income Fund (65%) 30

31 Standard Life s Guarantee Enhancer Concept You can achieve a 100% maturity benefit guarantee over a 10-year period You can put a cap on the amount of loss you are willing to take You can participate in the upside potential of equities You can lower your overall portfolio volatility 31

32 Data Input Investment Amount $250, year Guaranteed TermFund Rate 3.950% Segregated Fund 10-year Maturity Guarantee 75% Guaranteed Minimum Return on Investment if Requested 0.00% Principal Guarantee on Portfolio % Investment Mix Solution Segregated Fund Investment Term Fund Investment Total Initial Allocation % Initial Allocation $ Maturity Benefit Guarantee after 10 $ $ $ 65.4% $ 163, , % $ 86, , % $ 250, , Year Projections At At At At Other Minimum 3.0% 5.0% 6.0% 7.0% Segregated Fund Policy $ 122,679 $ 122,679 $ 266,441 $ 292,932 $ 321,770 TermFund Policy $ 127,321 $ 127,321 $ 127,321 $ 127,321 $ 127,321 Portfolio Value $ 250,000 $ 250,000 $ 393,762 $ 420,253 $ 449,092 32

33 Data Input Investment Amount $250, year Guaranteed TermFund Rate 3.950% Segregated Fund 10-year Maturity Guarantee 75% Guaranteed Minimum Return on Investment if Requested 2.00% Principal Guarantee on Portfolio % Investment Mix Solution Segregated Fund Investment Term Fund Investment Total Initial Allocation % Initial Allocation $ Maturity Benefit Guarantee after 10 $ $ $ 35.1% $ 87,863 65, % $ 162, , % $ 250, , Year Projections At At At At Other Minimum 3.0% 5.0% 6.0% 7.0% Segregated Fund Policy $ 65,897 $ 65,897 $ 143,119 $ 157,348 $ 172,839 TermFund Policy $ 238,852 $ 238,852 $ 238,852 $ 238,852 $ 238,852 Portfolio Value $ 304,749 $ 304,749 $ 381,970 $ 396,200 $ 411,691 33

34 Leverage Standard Life to help you create sustainable income solutions for your clients! 34

35 Signature Series Seg Funds 35

36 Standard Life Seg Funds 100% death benefit no restrictions on asset mix Continuous deposit after age 80 Unique Payout Guarantee dollar for dollar Higher commission 1.25% Platinum series lower MERs Resets twice a year on maturity benefit and once every three years on death benefit 36

37 Signature Series 37

38 Key Features: 1) 100% Death Benefit 100% Death Benefit, as long as contract opened up before age 80 Additional deposits beyond age 80 allowed No restrictions on asset mix 38

39 Key Features 2) Payout Benefit Guarantee Guarantees reduced dollar-for-dollar, not proportional reduction for scheduled withdrawals 39

40 Impact of Proportional Guarantee Reductions With proportional reductions, prevailing market conditions will dictate how the Death Benefit Guarantee and Maturity Benefit Guarantee* will be affected Scenario 1 Flat Market DBG and MBG at time of purchase: $100,000 Scenario 2 Down Market DBG and MBG at time of purchase: $100,000 # Units purchased: 10,000 # Units purchased: 10,000 Series Value at time of surrender: $100,000 Series Value at time of surrender: $50,000 NAV at time of surrender: $10 NAV at time of surrender: $5 Amount surrendered : $5,000 Amount surrendered $5,000 #Units surrendered (5%) 500 #Units surrendered (10%) 1,000 Proportional guarantee reduction: $5,000 DBG and MBG after Surrender: $95,000 Proportional guarantee reduction: $10,000 DBG and MBG after Surrender: $90,000 * All values are shown for illustration purposes and do not reflect any particular fund. Shown is the impact on guarantees for a product offering a 100% Death Benefit Guarantee (DBG) as well as a 100% Maturity Benefit Guarantee (MBG). This example assumes no growth nor resets occurred prior to surrender. 40

41 Impact of Linear Reduction (Dollar for Dollar) Guarantee Reductions With Dollar for dollar reductions, market conditions do not affect how the Death Benefit Guarantee and Maturity Benefit Guarantee* are reduced Scenario 1 Flat Market DBG and MBG at time of purchase: $100,000 Scenario 2 Down Market DBG and MBG at time of purchase: $100,000 - less amount surrendered : $5,000 - less amount surrendered : $5,000 DBG and MBG after Surrender: $95,000 DBG and MBG after Surrender: $95,000 * All values are shown for illustration purposes and do not reflect any particular fund. Shown is the impact on the Death Benefit Guarantee and the Maturity Benefit Guarantee for our Ideal Segregated Funds 100/100 Series. This example assumes no growth nor resets occurred prior to surrender. 41

42 Standard Life Segregated Funds MERs and High Net Worth Options 42

43 Key Features 3) Low MERs Segregated Fund Ideal 75/100 Signature 75/100 Signature 100/100 DSC DSC NL LL Platinum DSC NL LL Platinum SL Cdn Div Growth 2.54% 2.70% 2.70% 2.70% 2.17% 2.92% 2.92% 2.92% 2.28% SL Cdn Monthly Income 2.53% 2.70% 2.70% 2.70% 2.07% 2.92% 2.92% 2.92% 2.28% SL Cdn Equity 2.52% 2.70% 2.70% 2.70% 2.17% 2.92% 2.92% 2.92% 2.39% SL Cdn Bond 1.80% 2.12% 2.12% 2.12% 1.70% 2.33% 2.33% 2.33% 1.91% Fidelity CAA N/A 3.13% 3.13% 3.13% 2.60% 3.34% 3.34% 3.34% 2.81% Tempelton Global Inc N/A 3.13% 3.13% 3.13% 2.60% 3.34% 3.34% 3.34% 2.81% Resets of MB & DB N/A Yes Yes Yes Yes Yes Yes Yes Yes Portfolio 50% Cdn Equity & 50% Cdn Bond For the average investor (using the DSC, NL, or LL) For the higher net worth investor (using Platinum) 2.41% Total MER 1.935% Total MER 43

44 Savings Plans 44

45 Savings Plans Death Benefit Guarantee 45

46 Exclusive Features 46

47 Questions? 47

48 Talk soon. Thank You 48