BUILDING A TAX SMART RETIREMENT INCOME STRATEGY

Transcription

1 BUILDING A TAX SMART RETIREMENT INCOME STRATEGY PART OF THE EDUCATIONAL EXCHANGE WEBINAR SERIES BROUGHT TO YOU BY THE IRI ASSET MANAGERS COMMITTEE MAY 12, 2015, 2:00-3:00PM ET Audio Dial-in: (866) Conference Entry Code:

2 Introduction Moderated by: Theodore Enders, CFA Managing Director, Portfolio Strategist Strategic Advisory Solutions Group Goldman Sachs Asset Management

3 Presenters Peter Lefkin, Senior Vice President, Government and External Affairs, Allianz of America Corporation Donald Plotsky, Senior Product Manager, Western Asset Management Company, an Investment Affiliate of Legg Mason Christopher Hennessey, Lawyer and CPA, Babson College Executive Education; Putnam Investments

4 Introduction U.S. Tax Reform: Looking at 2015 and Beyond Peter Lefkin Senior Vice President, Government and External Affairs Allianz of America Corporation

5 Tax Reform Prospects for Enactment during this Congress are not good Chairman Ryan and Chairman Hatch are both looking at a 2017 strategy Reform can only take place with strong Presidential leadership which is not coming from President Obama General parameters are that tax reform be revenue neutral and lower tax rates while broadening the tax base and reducing existing tax preferences A comprehensive overhaul of the tax code is something that both parties generally acknowledge is needed The life industry is starting from behind in some ways - the 2014 Camp draft would have cost the life industry about $30 billion over ten years. In comparison, the p/c industry would have suffered only a $23 billion hit. In many ways, the Camp draft is still seen as the starting point for a tax overhaul For Financial Professional Use Only. Not For Use With The Public. AZOAC Government and External Affairs

6 Tax Reform Was Unworkable in 2014 s Divided Congress Legislative Process for Advancing Tax-Reform Proposal House Ways and Means Committee House of Representatives Senate Finance Committee U.S. Senate Proposal Enacted House Ways and Means Chair Dave Camp (R-MI) was an enthusiastic supporter of tax reform, and his tax reform proposal was intended to be a first step towards bipartisan compromise While House Republican leadership also supported overhauling the tax code in principle, they were ultimately unsupportive of Camp s plan and chose not to consider the legislation in an election year With the departure of former Senate Finance Chairman Max Baucus (D-MT), the committee lost its principal advocate for tax reform, and his replacement Ron Wyden (D-OR) could not convince Democratic leadership to support his committee s tax reform efforts Analysis Senate Democrats faced a tough election map in 2014, and Senate Majority Leader Harry Reid (R-NV) was largely unwilling to put controversial legislation up for a vote during an election year Despite a sustained effort by House Ways and Means Chairman Dave Camp (R-MI), comprehensive tax reform legislation was not passed in 2014 due to several factors that likely doomed the effort from the start Divided control of Congress with Republicans controlling the House and Democrats controlling the Senate made it difficult to reach an acceptable compromise and increased the number of lawmakers with effective veto power over any potential deal The timing of midterm elections in Fall 2014 also made reform less likely because leadership in both parties sought to avoid controversial votes and wanted to focus on other aspects of their platforms Source: National Journal Research, 2015; Lori Montgomery, Inside the Collapse of the Year s Biggest Tax Deal, Washington Post, December 11, For Financial Professional Use Only. Not For Use With The Public. AZOAC Government and External Affairs

7 Tax Reform The Life Industry has done a good job in making the case for the preservation of inside build up which was spared in the Camp Draft However, it exposed themselves to a variety of new corporate taxes, including those dealing with Deferred Acquisition Costs, and tax treatment of state and municipal bonds that are held in their portfolios Industry is making the case that the $30 billion of new taxes imposed upon life insurers in the Camp Draft over a ten year period is unfair, and be passed along to customers in the form of higher prices and lower returns Established an American Family Security Coalition to counter this and attempting to engage in a grass roots and grass tops lobbying campaign to make their message to Congress For Financial Professional Use Only. Not For Use With The Public. AZOAC Government and External Affairs

8 Tax Reform Life and Annuity Industry opposed some of the Camp Draft ideas such as: Replace the prescribed discount rate for computing life insurance reserves with a modified version of the applicable federal mid-term rate. This proposal has been estimated by the Joint Committee on Taxation (JCT) to raise $9.9 billion over 5 years and $24.5 billion over 10 years Repeal the special 10-year period for adjustments to take into account changes in computing reserves by life insurance companies. This proposal has been estimated by the JCT to raise $1 billion over 5 years and $2.5 billion over 10 years Modify the rules concerning the capitalization of certain policy acquisition expenses. This proposal has been estimated by the JCT to raise $5.8 billion over 5 years and $11.7 billion over 10 years For Financial Professional Use Only. Not For Use With The Public. AZOAC Government and External Affairs

9 Additional Tax Concerns Camp draft would cut by one half the amount of money that people can put into tax preference accounts Obama Administration proposal to cap the amount of money people can place into qualified retirement accounts Concerns that these proposals would lead to diminish size of accounts and produce smaller IRA rollovers For Financial Professional Use Only. Not For Use With The Public. AZOAC Government and External Affairs

10 Building a Tax Smart Retirement Income Strategy Donald Plotsky Senior Product Manager Western Asset Management Company, an Investment Affiliate of Legg Mason

11 USD Long Term Return Comparison: $30 $25 S&P 500 Total Return $20 10% Steady Return $15 Barclays U.S. High-Yield Index $10 8% Steady Return Barclays U.S. Aggregate Index $5 $ Source: Barclays, Bloomberg. As of 31 Mar 15 Annualized Returns Annualized Standard Deviation of Monthly Returns Sharpe Ratio Barclays U.S. High-Yield Index 9.18% 8.45% 0.59 S&P % 15.02% 0.44 Barclays U.S. Aggregate Index 7.54% 4.29% 0.78 Past performance is not a guarantee of future results. 11

12 USD Intermediate Term Return Comparison: $5 $4 10% Steady Return $3 $2 8% Steady Return Barclays U.S. High- Yield Index Barclays U.S. Aggregate Index S&P 500 Total Return $1 $ Source: Barclays, Bloomberg. As of 31 Mar 15 Annualized Annualized Standard Deviation Sharpe Returns of Monthly Returns Ratio Barclays U.S. High-Yield Index 7.53% 9.93% 0.56 S&P % 15.19% 0.15 Barclays U.S. Aggregate Index 5.71% 3.50% 1.06 Past performance is not a guarantee of future results. 12

13 USD Performance Through The Crisis Growth of Dollar 31 May Mar 15 Price Return (%) Income Return (%) Annualized Return (%) Barclays U.S. High-Yield Index S&P 500 Total Return Source: Barclays, Bloomberg, Western Asset Value of a Dollar Barclays U.S. High-Yield Index Value of a Dollar S&P 500 TR Index Source: Barclays, Bloomberg, Western Asset. As of 31 Mar 15 Past performance is not a guarantee of future results. 13

14 U.S. Treasury Citi US BIG Index U.S. Aggregate Index U.S. MBS Index U.S. Credit Index U.S. Long Gov/Credit Index Non-Agency MBS¹ S&P/LSTA Performing Loan Index JPMorgan CEMBI Broad Index JPM EMBI Global U.S. High-Yield Credit Index Yield (%) Does High Quality Equal Low Risk? 16 Yield Option-Adjusted Duration Option-Adjusted Duration (yrs) Source: Barclays, Citigroup, JPMorgan, S&P/LSTA, Western Asset. As of 31 Mar 15 ¹Internal estimate of the non-agency universe. There is no official benchmark. Non-Agency yields are loss adjusted. Indices are Barclays unless otherwise noted. Past Performance is no guarantee of future results. 14

15 Effective Tax Rate for Investments Bracket Maximum Earnings Long Term Capital Gains/ Passive Income/ Non-Qualified Difference Qualified Dividends* Dividends** $18, % 10.0% 10.0% $73, % 15.0% 15.0% $148, % 25.0% 10.0% $226, % 28.0% 13.0% $250, % 33.0% 18.0% $405, % 36.8% 18.0% $457, % 38.8% 20.0% > $457, % 43.4% 19.6% Source: Internal Revenue, Western Asset "*The tax rates include the 3.8% tax rate on passive income. This rate applies to both income and gains and begins at income levels of $250,000 and greater. **These rates exclude State and Local Taxes" 15

16 Typical Target Date Fund Asset Allocation Typical Target Date Fund Asset Allocation Age Range Years to Retirement Stocks 90% 85% 50% Bonds 10% 15% 50% Based on an average of the top three target date funds by asset size as of 31 Mar

17 Active Managers Do Add Value In Fixed-Income Total Return Excess Return 1-Year 3-Years 5-Years 7-Years 10-Years 1-Year 3-Years 5-Years 7-Years 10-Years US Intermediate Term Bond Universe Total Return Excess Return Median Manager (0.58) Passive Manager (0.23) (0.18) (0.18) (0.17) (0.14) Barclays Index Large Cap Blend Equity Universe Total Return Excess Return Median Manager (1.64) (0.82) (1.12) (0.56) (0.48) Passive Manager (0.17) (0.18) (0.17) (0.12) (0.12) S&P 500 Index Percentage of Active Managers That Outperform: 1-Year 3-Years 5-Years 7-Years 10-Years Vs. Barclays U.S. Aggregate Index 22% 71% 70% 71% 56% Vs. S&P 500 Index 24% 29% 20% 28% 27% Source: Morningstar. As of 31 Mar 15 Performance shown represents past performance and is no guarantee of future results. US Intermediate Bond Universe includes 279 fixed income mutual funds listed by Morningstar, including 263 actively managed funds and 16 passively managed funds. Large Cap Stock Blend universe includes 454 large cap equity mutual funds listed by Morningstar, including 385 actively managed funds and 70 passively managed funds. Analysis does not include ETFs. Manager refers to individual funds in this analysis rather than their parent companies. Passive manager reflects the average performance of the passively managed fund in each universe. Median manager reflects the performance of the median fund based on 10 year return. Returns shown are exclusive of sales charges. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. FOR FINANCIAL PROFESSIONAL USE ONLY. 17

18 Risk Disclosures Investments in fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. An increase in interest rates will reduce the value of fixed income securities. The Fund may use derivatives, such as options and futures, which can be illiquid, may disproportionately increase losses, and have a potentially large impact on Fund performance. International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. Asset-backed, mortgage- backed or mortgage-related securities are subject to prepayment and extension risks. Risks of high-yield securities include greater price volatility, illiquidity and possibility of default. Potential active and frequent trading may result in higher transaction costs and increased investor liability. Diversification does not assure a profit or protect against market loss. Please see the prospectus for a more complete discussion of the Fund's risks. Western Asset Management Company This presentation is the property of Western Asset Management Company and is intended for the sole use of its clients, consultants, and other intended recipients. It should not be forwarded to any other person. Contents herein should be treated as confidential and proprietary information. This material may not be reproduced or used in any form or medium without express written permission. Past results are not indicative of future investment results. This presentation is for informational purposes only and reflects the current opinions of Western Asset Management. Information contained herein is believed to be accurate, but cannot be guaranteed. Opinions represented are not intended as an offer or solicitation with respect to the purchase or sale of any security and are subject to change without notice. Statements in this material should not be considered investment advice. Employees and/or clients of Western Asset Management may have a position in the securities mentioned. This presentation has been prepared without taking into account your objectives, financial situation or needs. Before acting on this information, you should consider its appropriateness having regard to your objectives, financial situation or needs. It is your responsibility to be aware of and observe the applicable laws and regulations of your country of residence Legg Mason Investor Services, LLC, member FINRA, SIPC. Western Asset Management Company and LMIS are subsidiaries of Legg Mason, Inc. FN

19 Developing a Tax-Smart Retirement Income Strategy Christopher Hennessey Lawyer and CPA Babson College Executive Education; Putnam Investments

20 Impact of Taxes on the Success of an Income Plan Historical portfolio survival 20 years 30 years 40 years No taxes 96% 76% 54% 25% tax rate 76% 41% 15% 35% tax rate 59% 24% 3% 0 59% probability 60% 79% probability 80% 100% probability These illustrations are based on a rolling historical time period analysis and do not account for the effect of taxes, nor do they represent the performance of any Putnam fund or product, which will fluctuate. These illustrations use the historical returns from 1926 to 2012 of 60% stocks (as represented by an S&P 500 composite), 30% bonds (as represented by a 20-year long-term government bond (50%) and a 20-year corporate bond (50%)), and 10% cash (U.S. 30-day T-bills) to determine how long a portfolio was likely to last given a 5% withdrawal rate increased each year to account for inflation. A one-year rolling average is used to calculate performance of the 20-year bonds. Past performance is not a guarantee of future results. The S&P 500 Index is an unmanaged index of common stock performance. You cannot invest directly in an index.

21 Optimizing a Plan: The Benefits of Tax Diversification Offers flexibility to draw from different income sources in retirement to better manage personal tax bill Optimized, tax-efficient withdrawals may allow a portfolio to last longer Provides a hedge against the direction of future tax rates

22 Allocating Assets by Tax Position Ordinary income Maximum tax rate of 39.6% Long-term capital gains and qualified dividends Maximum tax rate of 20% Taxable Tax-deferred Tax-free Buy and hold stocks or mutual funds Dividend-paying stocks or mutual funds Fixed income REITs Other incomeproducing assets Growth stocks and mutual funds Actively traded stocks

23 Roth IRA: Creating a Tax-Free Bucket for Income in Retirement Tax law changes open the door to Roth IRA Economic Growth and Tax Relief Reconciliation Act: Roth 401(k) accounts available for employee salary deferrals Pension Protection Act: Direct rollovers from qualified retirement plans to a Roth IRA available Tax Increase Prevention and Reconciliation Act: Income requirement ( $100,000 in MAGI) on Roth conversions is eliminated Roth conversions within 401(k) plans now available* * This provision was introduced by the Small Business Jobs and Credit Act of 2010 and amended by the American Taxpayer Relief Act of 2012 to apply to all participants within the plan; 401(k) plan must offer Roth option for salary deferrals.

24 Tax-efficient Withdrawals Retirees may realize better results by designing a more tax-efficient withdrawal strategy According to Putnam research, historically the conventional wisdom on order of withdrawals for income in retirement has been: Taxable assets Tax-deferred assets Tax-free assets When considering personal tax circumstances and other objectives, a different approach may make sense

25 Tax-efficient Withdrawals Situation Lower marginal tax rate Higher marginal tax rate Significant capital appreciation in taxable account Working in retirement Then Consider Draw from tax-deferred assets to maximize use of lower relative tax bracket, which may help reduce RMDs at age 70½ Use tax-free or taxable assets to avoid higher income tax rate and/or take advantage of lower capital gains tax rates If legacy goal exists, preserve taxable assets to take advantage of step-up in basis at death Avoid tax-deferred assets, which will increase overall income (e.g., higher income may result in Social Security benefits being taxed)

26 QUESTIONS? PLEASE SUBMIT USING THE Q&A GROUP BOX ON THE RIGHT OF YOUR SCREEN

27 Thank you for attending! More information, including topical resources and the webinar playback, will be available on the IRI Members Only Website Click HERE to visit the resources site.