Retirement Income Charting a Course to Help Your Money Last

Transcription

1 Retirement Income Charting a Course to Hep Your Money Last Peter Murphy, CFP Financia Partners Securities are offered through LPL Financia, Member FINRA/SIPC. Investment Advice offered through Financia Partners, LLC, a registered investment advisor and separate entity from LPL Financia.

2 Workshop Objectives Introduce Educate Iustrate

3 Our Commitment Provide sound financia information Hep you identify goas Offer compimentary consutation The information provided in this presentation is not written or intended as tax or ega advice, and it may not be reied on for the purpose of avoiding any federa tax penaties. Individuas are encouraged to seek advice from their own tax or ega counse.

4 Evauation Form

5 About Your Workbook Informative graphics Wide margins Hepfu exercises

6 How Do You Envision Retirement? Gof? Trave? Vacation home?

7 Retirement: Beginning a New Voyage A time of changing tides, with you at the hem Where do you start?

8 What Happens When You Retire? THE RULES ARE DIFFERENT Possibe change in habits and attitudes about investing and spending money Change of focus from accumuating assets to withdrawing assets Importance of generating income and making the most of your hard-earned money Need to protect your income and assets

9 5 Action Items to Chart Your Course 1. Size Up Current Situation and Sources of Income 2. Choose a Distribution Method 3. Understand Distribution Rues 4. Deveop an Investment Strategy 5. Prepare for the Unexpected

10 Size Up Current Situation How do you intend to spend your retirement? How wi you support your desired ifestye?

11 Length of Retirement At age 65, a heathy individua may expect to spend 20 years or onger in retirement. Chance of iving to Age 85 Age 90 Man 54% 34% Chance of iving to Age 85 Age 90 Woman 64% 45% Source: Society of Actuaries, 2016

12 Impact of Infation $1,000,000 $820,000 $680,000 Assumes 4% infation $560,000 $460,000 Today 5 years 10 years 15 years 20 years This is a hypothetica iustration. Actua resuts wi vary.

13 Loss of Purchasing Power Current Cost Historica Annua Infation Cost in Year Seect Basic cabe TV $76 per month 4.8% Postage stamp $ % Automobie $34, % Cacuate Reset Sources: Federa Communications Commission, 2016 (data from 2005 to 2015); U.S. Posta Service, 2017 (data from 1971 to 2017); Keey Bue Book, 2016 (data from 1970 to 2016). Future costs are estimates and assume that historica infation rates remain constant. Actua resuts wi vary. BACK TO MAIN PRESENTATION

14 Lifestye You wi probaby need at east 70% to 80% of your pre-retirement income to ive comfortaby in retirement.

15 Primary Sources of Retirement Income Persona savings and investments Socia Security Continued empoyment earnings

16 Persona Savings and Investments Tax-deferred vehices Empoyer-sponsored pans IRAs Annuities Taxabe vehices Stocks Bonds Cash aternatives Mutua funds

17 Socia Security Age 62: Monthy benefit woud be reduced to 75% or 70% of fu benefit, depending on year of birth Fu retirement age (66 to 67): Entited to 100% of fu benefit Age 70 (atest age): Monthy benefit woud be up to 132% of fu benefit, depending on year of birth Married coupes have additiona options, such as spousa and survivor benefits.

18 Taxes on Socia Security Benefits Taxabe portion of benefits Singe fier Combined income threshods Married joint fier 50% $25,000 to $34,000 $32,000 to $44,000 85% Over $34,000 Over $44,000 Combined income formua used by the IRS: Adjusted gross income + Tax-exempt interest + 50% of Socia Security benefits BACK TO MAIN PRESENTATION

19 The Effect of Fiing at Different Ages Worker benefit Spousa benefit* 86.7% 80% 75% 35% 37.5% 41.7% 132% 124% 116% 108% 100% 93.3% 45.8% 50% 50% 50% 50% 50% Fiing age Assumes fu retirement age of 66. *The percentages for the spousa benefit are based on the primary worker s Primary Insurance Amount (benefit at fu retirement age).

20 Lifetime Benefits If you deay fiing for Socia Security, you might increase not ony your monthy benefit but aso your ifetime benefits, depending on how ong you ive. $700,000 Age 70 Maximum monthy benefit: $2,640 Age 66 Fu monthy benefit: $2,000 Age 62 Reduced monthy benefit: $1,500 $633,600 $576,000 $504,000 $350,000 $ This hypothetica exampe is used for iustrative purposes ony. Actua benefits and resuts wi vary.

21 Continued Empoyment Earnings 79% Athough 79% of workers expect to work for pay in retirement, ony 29% of today s retirees have actuay done so. 29% Pan to work (workers) Actuay work (retirees) Source: Empoyee Benefit Research Institute, 2017

22 How Much Woud You Need? Page 6 Exampe You 1. Annua income desired $ 75, Savings needed to provide desired income in retirement (ine 1 x factor B) $1,115, Savings needed to provide desired income indefinitey (ine ) $2,500,000 The hypothetica exampe shown assumes a 20-year retirement. The cacuation assumes a 3% after-tax rate of return. BACK TO MAIN PRESENTATION

23 5 Action Items to Chart Your Course 1. Size Up Current Situation and Sources of Income 2. Choose a Distribution Method 3. Understand Distribution Rues 4. Deveop an Investment Strategy 5. Prepare for the Unexpected

24 How Long Woud a Retirement Portfoio Last? $500,000 $400,000 $300,000 $200,000 $100,000 8% 4% Tax-deferred accounts 3% annua infation rate $50,000 infation-adjusted annua withdrawas Start Year 5 Year 10 Year 15 Year 20 This hypothetica exampe is used for iustrative purposes ony and does not refect the performance of any specific investment. It compares two $500,000 portfoios: one earning 4% annuay, the other earning 8% annuay. The principa vaues and yieds of securities wi fuctuate with changes in market conditions so that investments, when sod, may be worth more or ess than their origina cost. Taxes, fees, and other expenses were not considered.

25 How Long Wi Your Savings Last? Page 8 BACK TO MAIN PRESENTATION

26 Assess Drawdown Strategies The 4% rue? Endowment method? Distribution period tabes?

27 Identify What to Spend First Taxabe before tax deferred? Winners before osers? Do you want to eave highy appreciated assets to heirs?

28 What s So Great About Tax Deferra? Taxabe (28% rate) $1,398,905 Tax deferred Tax-deferred account, after taxes $1,063,212 $5,000 annua contribution 8% rate of return 28% tax rate $68,919 $78,227 $247,115 $189,577 $611,729 $400,815 $770, years 20 years 30 years 40 years This hypothetica exampe is used for comparison purposes ony and This does hypothetica not represent exampe any is specific used for investments. comparison purposes Actua resuts ony and wi does vary. not represent any specific investments. Actua resuts wi vary. BACK TO MAIN PRESENTATION

29 Main Distribution Methods Stay put Lump-sum distribution Systematic withdrawas Lifetime annuity OR consider an IRA roover

30 Lump-Sum Distribution A ump-sum distribution gives you immediate access to and contro of your funds. The downside is that income taxes are due on the tota amount of the distribution.

31 Systematic Withdrawas Possibe payout options: Fixed doar amount on a reguar schedue Specific percentage of account vaue on a reguar schedue Tota vaue of account in equa distributions over a specific period of time Monthy, quartery, semi-annua, or annua payments

32 Lifetime Annuity Payment Options Retiree Monthy Benefit Survivor Monthy Benefit Singe ife $1,667 $0 Joint and 100% survivor $1,175 $1,175 Joint and 50% survivor $1,500 $750 This hypothetica exampe is used for iustrative purposes ony and does not represent any specific annuity payment.

33 Distribution Aternative Using Life Insurance Maximum pension income during pensioner s ifetime Singe-ife pension benefit Life insurance premiums Life insurance provides income to surviving spouse BACK TO MAIN PRESENTATION

34 Which Distribution Method Is Appropriate for You? Age Liquidity needs Market voatiity vs. preservation of funds Income needs Tax situation

35 IRA Roover/Transfer Continued tax deferra Generay, more investment options Can consoidate funds from mutipe pans Potentia to stretch savings Mandatory distributions at age 70½ (traditiona IRA)

36 Using a Stretch IRA Initia vaue: $302,000 (after-tax) Net after-tax distributions Asset vaue $1,416,165 $702,659 Lump sum $2,506,541 $1,673,969 $713,506 $832,572 Initia vaue: $500,000 (pre-tax) Stretch IRA This hypothetica exampe is used for iustrative purposes ony and does not represent any specific investment. Rates of return wi vary over time, particuary for ong-term investments. Actua resuts wi vary. Passing an IRA to your heirs can significanty increase the ong-term vaue of your egacy. Assumptions: 45-year-od beneficiary of $500,000 traditiona IRA 39.6% tax rate for initia ump-sum distribution 28% tax rate for other distributions 7% annua rate of return RMDs taken over 40-year time horizon BACK TO MAIN PRESENTATION

37 IRA Roover Considerations Trustee-to-trustee transfer versus roover check 20% withhoding 60-day rue Partia or tota roover One-roover-per-year rue

38 Consider the Advantages of a Roth IRA Tax-free quaified distributions No required distributions Taxes owed on assets converted to a Roth IRA Income eigibiity to make contributions

39 5 Action Items to Chart Your Course 1. Size Up Current Situation and Sources of Income 2. Choose a Distribution Method 3. Understand Distribution Rues 4. Deveop an Investment Strategy 5. Prepare for the Unexpected

40 Age 59½ Rue Exceptions to 10% eary-withdrawa penaty: Death or permanent disabiity Separation from service Age 55 or oder Periodic withdrawas Quaified medica expenses (exceeding 10% of AGI) Additiona IRA exceptions: Quaified higher-education expenses First-time home purchase ($10,000 ifetime maximum) Periodic withdrawas Other exceptions may appy. Other exceptions may appy. 10% penaty for eary withdrawas

41 Penaty-Free Eary Distribution Substantiay equa periodic payments Age 50 Age 56 Age 58 9½-year payout period 5-year payout period 5-year payout period

42 Required Minimum Distributions Faiure to take the required distribution coud resut in a 50% excess accumuation penaty on the amount that shoud have been withdrawn.

43 Key RMD Rues to Foow Latest date for first distribution: Apri 1 of the year after you turn 70½ May deay withdrawas from current empoyer s pan (if sti empoyed) Annua RMD depends on your age, account vaue, and ife expectancy

44 Don t Forget to Name Beneficiaries Can change beneficiaries at any time Choose primary and contingent beneficiaries Keep paperwork in order

45 5 Action Items to Chart Your Course 1. Size Up Current Situation and Sources of Income 2. Choose a Distribution Method 3. Understand Distribution Rues 4. Deveop an Investment Strategy 5. Prepare for the Unexpected

46 Asset Aocation A systematic approach to diversification that determines an efficient mix of assets for an investor.

47 Historica Investment Performance Stocks 9.15% average annua return Corporate bonds 6.55% average annua return T-bis 2.62% average annua return 40% 30% 20% 10% 0% 10% 20% 30% 40% Source: Thomson Reuters, The returns shown do not incude taxes, fees, and other expenses. Past performance is not a guarantee of future resuts. Actua resuts wi vary. BACK TO MAIN PRESENTATION

48 Sampe Asset Aocation Modes Conservative investor Aggressive investor Cash aternatives 20% Bonds 50% Stocks 30% Bonds 20% Stocks 75% 5% Cash aternatives This hypothetica exampe is used for iustrative purposes ony.

49 Twenty-Year Performance Record Conservative portfoio Best year 17.3% Worst year 14.8% Avg. annua 6.1% Aggressive portfoio Best year 28.5% Worst year 31.4% Avg. annua 7.3% Bonds 50% Cash aternatives 20% Stocks 30% Stocks 75% Bonds 20% 5% Cash aternatives Source: Thomson Reuters, Past performance is no guarantee of future resuts. The returns shown do not incude taxes, fees, and other expenses. Actua resuts wi vary. BACK TO MAIN PRESENTATION

50 Investing in Retirement Choose a we-diversified mix of investments and financia vehices Cash aternatives for preservation of principa Bonds for stabiity and income Stocks for growth potentia Mutua funds for income and growth potentia

51 Tax-Exempt Investing Tax-exempt yied 2% 3% 4% 5% Federa Income tax bracket 10% 15% 25% 28% 2.22% 2.35% 2.67% 2.78% 3.33% 3.53% 4.00% 4.17% 4.44% 4.71% 5.33% 5.56% 5.56% 5.88% 6.67% 6.94% 33% This hypothetica exampe is used for iustrative purposes ony. Actua resuts wi vary. 35% 2.99% 4.48% 5.97% 7.46% 3.08% 4.62% 6.15% 7.69% 39.6% 3.31% 4.97% 6.62% 8.28% Taxabe equivaent yied This chart is used for genera iustrative purposes and does not refect the performance of any specific investment.

52 Investing for a Long Retirement Hypothetica $850,000 portfoio, divided into 3 parts Second fixed-income vehice depeted after 10 years $850,000 after 10 years Depeted after 5 years $206,026 used to invest in a new fixed-income vehice after 5 years $206,026 $169,338 $474,636 Fixed-income 3%, withdrawing $45,000 annua income for 5 years ($32,400 after taxes) Conservative 4% Growth 6% This hypothetica exampe is used for iustrative purposes ony and does not represent any specific investments. Fees and charges are not considered. Actua resuts wi vary.

53 Income-Producing Vehices Bonds Income mutua funds Dividend-paying stocks Fixed annuities

54 Bonds Long-term IOU Reguar, fixed income Principa repaid at the end of the contract Interest-rate risk Defaut risk

55 Income Mutua Funds Low initia investment Professiona management Diversification Fexibiity Market risk Income can fuctuate Mutua funds are sod ony by prospectus. Pease consider the investment objectives, risks, charges, and expenses carefuy before investing. The prospectus, which contains this and other information about the investment company, is avaiabe from your financia professiona. Be sure to read the prospectus carefuy before deciding whether to invest.

56 Dividend-Paying Stocks Some stocks distribute some of their profits as dividends If profits decrease, the dividend coud be cut Vaue fuctuates with changes in market conditions

57 Consider Investing in Dividend-Yieding Securities Hypothetica $250,000 portfoios, 35% tax bracket Certificates of Deposit Dividend-Yieding Securities Hypothetica 1.0% rate of return, taxed as interest income at 35% Hypothetica 2.0% rate of return, taxed as dividend income at 15% $5,000 $4,250 Annua income Annua taxes $2,500 $875 $1,625 $750 Annua net income Difference: $2,625 a year This hypothetica exampe is used for comparison purposes ony and does not represent any specific investments. Actua resuts wi vary. BACK TO MAIN PRESENTATION

58 Fixed Annuities Insurance-based contract Competitive rate of return Tax-deferred accumuation No federa contribution imits No mandatory distributions Option for guaranteed ifetime income* *The guarantees of fixed annuity contracts are contingent on the financia strength and caims-paying abiity of the issuing insurance company.

59 What Kinds of Fixed Annuities Are Avaiabe? Deferred Immediate

60 Annuities Can Provide Fixed, Variabe, or Indexed Returns Fixed Variabe Indexed Variabe annuities are sod ony by prospectus. Pease consider the investment objectives, risks, charges, and expenses carefuy before investing. The prospectus, which contains this and other information about the variabe annuity contract and the underying investment options, can be obtained from your financia professiona. Be sure to read the prospectus carefuy before deciding whether to invest.

61 How an Immediate Annuity Works $100,000 initia premium 3.5% return Payout over 20 years $6,722 annua income ($560 per month) Ony $1,722 taxabe ($143 per month) This hypothetica exampe is used for iustrative purposes ony. Actua resuts wi vary.

62 Cacuating Income from an Immediate Fixed Annuity Contract amount $ Rate of return (0% to 10%) % Years in retirement Cacuate Reset Monthy income $ Annua income $ Tota income $ This hypothetica exampe is used for iustrative purposes ony and does not represent any specific annuity contract. Actua resuts wi vary. BACK TO MAIN PRESENTATION

63 Case Study The Thompsons Situation 65 years od $700,000+ retirement portfoio invested in empoyer stock and CDs Concerned about outiving their money Need to decide how to generate retirement income from their portfoio This hypothetica exampe is used for iustrative purposes ony.

64 Case Study The Thompsons Strategy 1. Invest $400,000 of origina $700,000 portfoio eveny in: Company stock Corporate bonds Treasury bis Rea estate 2. Purchase $300,000 immediate fixed annuity that generates: $1,740 per month of income ($490 taxabe) Stabiity Income they can t outive This hypothetica exampe is used for iustrative purposes ony. The fixed annuity assumes an initia premium of $300,000, a 3.5% annua rate of return, and a ife expectancy of 20 years. It does not consider the effects of saes charges or other expenses. Actua resuts wi vary.

65 Case Study The Thompsons Origina portfoio Company stock $450,000 x 3% = $13,500 CDs $250,000 x 2% = $ 5,000 $18,500 Diversified portfoio Company stock $100,000 x 3% = $ 3,000 Corporate bonds $100,000 x 3% = $ 3,000 Treasury bis (10-year) $100,000 x 2% = $ 2,000 Rea estate $100,000 x 5% = $ 5,000 $13,000 Fixed annuity annua payment $20,880 $33,880 This hypothetica exampe is used for iustrative purposes ony. It assumes an initia premium of $300,000, a 3.5% annua rate of return, and a ife expectancy of 20 years. It does not consider the effects of saes charges or other expenses. Actua resuts wi vary.

66 Case Study The Thompsons Resut Diversified portfoio Greater stabiity Higher income This hypothetica exampe is used for iustrative purposes ony. Actua resuts wi vary.

67 5 Action Items to Chart Your Course 1. Size Up Current Situation and Sources of Income 2. Choose a Distribution Method 3. Understand Distribution Rues 4. Deveop an Investment Strategy 5. Prepare for the Unexpected

68 Case Study The Wisons $800,000 $600,000 $400,000 $200,000 After crisis Assumptions: $750,000 initia portfoio $45,000 annua withdrawas for income 3% annua infation of income 5% annua portfoio growth $276,159 ong-term-care costs over 3 years Before crisis $0 Age This hypothetica exampe is used for iustrative purposes ony. Taxes and investment expenses are not considered. Actua resuts wi vary.

69 Protect What You Have Long-term care needs Heath-care coverage Estate conservation

70 The Cost of Long-Term Care Nationa average nursing-home cost: $92,400 Source: 2016 Cost of Care Survey, Genworth Financia, Inc. (cost for a private room in a nursing home)

71 What Are Your Options? Sef-insure Medicaid Long-term care insurance

72 Heath-Care Costs 3.9% Heath-care costs Genera infation 2.9% 2.4% 2.1% 0.8% 0.7% Source: U.S. Bureau of Labor Statistics, 2017

73 Fiing the Gaps in Medica Insurance Heath-care options: Origina Medicare Parts A and B Medicare prescription drug program (Part D) Medicare Suppement Insurance (Medigap) Medicare Advantage (Part C)

74 Estate Conservation In 2017, the federa estate tax is 40% on taxabe estate assets exceeding $5.49 miion.

75 Using an Irrevocabe Life Insurance Trust Life insurance poicy Irrevocabe trust Proceeds free of estate taxes

76 Where Do You Go from Here?

77 Where Do You Go from Here? Do it yoursef Work with others Work with us Procrastinate

78 Evauation Form

79 What to Bring

80 Thank You