Shifting Gears. Considerations and Strategies for Pre-Retirees

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1 Shifting Gears Considerations and Strategies for Pre-Retirees 1

2 Shifting Gears What s ahead? 2

3 Shifting Gears Think about: Your retirement Savings Social Security Retirement income strategies 3

4 Shifting Gears Navigate the road ahead Longevity Inflation Health care costs 4 Investment risks 5 Public policy 4

5 Time To Shift Gears Shifting Gears Road bumps Longevity and Inflation Average life expectancy 78+ years percent chance one spouse will live to years of income = $1.5M without inflation! 3 Income needs may double in 30 years 4. 1 Centers for Disease Control, Deaths, Preliminary Data for For couple at age IAM Basic Mortality table. 3 Assuming an 85 percent replacement ratio for a current salary of $40,000 over 30 years. Does not account for inflation or investment return. 4 Assuming inflation averages 2.5 percent a year. Amounts shown do not reflect the impact of taxes on pre-tax distributions. Individual taxpayer circumstances may vary. Examples are for illustrative purposes only. 5

6 Time To Shift Gears Shifting Gears Road bumps Health care costs Couple may need $207,000 for out-of-pocket healthcare costs 1. Additional costs for long-term care, assisted living. Keep in mind Medicare eligibility at age Savings needed for Medigap premiums, Medicare Part B and Part D premiums and out-of-pocket prescription drug expenses. Assumes median drug expenses and excludes long-term care. Employee Benefit Research Institute, October 2013, 6

7 Time To Shift Gears Shifting Gears Road bumps Investment risks and public policy Ups and downs are inevitable. Diversify investments to balance risk and return. Changes to taxes and public programs are out of your control. Create a strategy for your personal situation. No investment strategy, such as asset allocation or diversification, can guarantee a profit or protect against loss in periods of declining values. Individual taxpayer circumstances may vary. Examples are for illustrative purposes only. 7

8 Plan Your Retirement Wants Needs Sources of income 8

9 Plan Your Retirement What are your retirement dreams? Travel? Volunteer? Start a business? Pursue a hobby? School? 9

10 Plan Your Retirement What do you NEED in your retirement? Mortgage or rent? Doctor and medical bills? Groceries and eating out? Insurance? Car payments? Entertainment? Credit card payments? 10

11 Plan Your Retirement RETIREMENT PLANS PENSIONS SAVINGS SOURCES OF INCOME RENTAL PROPERTIES OTHER? SOCIAL SECURITY 11

12 Plan Your Retirement Shift savings strategy into high gear Consolidate retirement accounts Multiple types of savings Save more 12

13 Plan Your Retirement The impact of catch-up contributions CATCH-UP CONTRIBUTIONS These examples are for illustrative purposes only. They assume a $100,000 starting balance contributions made for eight years from age 57 to 65 and a 7 percent annual rate of return. The $24,000 contribution, including the IRS maximum contribution of $18,000 plus a catch-up contribution of $6,000, is for illustrative purposes. The IRS contribution limits are indexed and may be adjusted annually. The assumed rate of return is hypothetical and does not guarantee any future returns nor represent the return of any particular investment options. 13

14 Social Security Benefits Impact on income Timing Working while collecting Taxation of benefits Options for married couples 14

15 Social Time Security To Shift Benefits Gears Impact of Social Security Sources of retirement income for average income earners to replace 85% 100% of pre-retirement income. 40% 45-60% Employer-Sponsored Retirement Plan, Personal Savings and Other Sources Social Security Assumes 85 to 100 percent replacement ratio with 40 percent replacement from Social Security for worker earning $40,000 a year prior to retirement. 15

16 Social Time Security To Shift Benefits Gears When to retire? YOUR AGE AND YOUR BENEFIT PROS Higher monthly check Highest monthly paycheck Receive benefits earlier No penalty for employment No penalty for employment AGE Smallest monthly check No interim benefits Receive benefits later CONS Potential reduction penalty for employment Source: Social Security Administration, 16

17 Social Time Security To Shift Benefits Gears Working while collecting AGE Under Full Retirement Age (FRA) In the year FRA is reached 2015 EMPLOYMENT INCOME LIMITS $15,720 $41,880 CONSIDERATIONS For every $2 you earn over the limit, $1 is withheld from your Social Security benefits until the month in which FRA is reached. For every $3 you earn over the limit, $1 is withheld from your Social Security befits until the month in which FRA is reached. At FRA or older 1 No limits on earnings None 1 At FRA, your benefit amount is adjusted to accommodate for the earlier reduction. Source: Social Security Administration, 17

18 Social Time Security To Shift Benefits Gears Social Security and taxes SINGLE MARRIED FILING JOINTLY Provisional Income Benefit Subject to Tax Provisional Income Benefit Subject to Tax Under $25,000 0% Under $32,000 0% $25,000 $34,000 Up to 50% $32,000 $44,000 Up to 50% Over $34,000 Up to 85% Over $44,000 Up to 85% Note: State and local taxes may differ. Source: SSA Publication No , September 2011, Your Benefits May Be Taxable, 18

19 Social Time Security To Shift Benefits Gears When should each spouse claim? Considerations for married couples Personal benefit or spousal benefit? Will survivor s benefit be enough? Other strategies? Source: SSA Publication No , September 2011, Family Benefits, 19

20 Social Time Security To Shift Benefits Gears Other strategies SOCIAL SECURITY STRATEGY DEFINITION BENEFIT Claim and Suspend Individual at FRA (typically higher wage earner) claims then suspends personal benefit, allowing spouse, also at FRA, to claim Spousal Benefit. Allows spouse to claim Spousal Benefit, while the higher wage earner can continue to accrue benefits. Can increase the overall lifetime benefits. Claim Now, Claim More Later An individual at FRA may claim a Spousal Benefit, delay taking their own benefit. 1 Can earn delayed credits to claim higher personal benefit at a later age, which may also help spouse receive greater survivor benefit. 1 Benefit will be reduced if not at Full Retirement Age. Both individuals must have filed for Social Security benefits. Source: Social Security Administration, 20

21 Social Time Security To Shift Benefits Gears Request an estimate 21

22 Social Security Benefits Chart your Social Security strategy Obtain your benefit estimate at Plan to apply for benefit three months prior to needing Social Security income. Visit with your financial professional. 22

23 Shift From Savings Strategies to Retirement Income Strategies How to cover expenses? What to do with savings? Consider types of income. Take action to create income. 23

24 Retirement Income GUARANTEED INCOME NEEDS Social Security Company pensions Annuities Any wages earned in retirement COVER NEEDS Food Clothing Shelter Health care Transportation Income taxes VARIABLE INCOME SOURCES WANTS Retirement plans [401(k), 403(b), ESOP] and IRAs Personal savings (CDs, bank accounts, money market accounts) Investments (stocks, bonds, mutual funds, real estate) COVER WANTS Hobbies/leisure Travel Entertainment Club memberships Gifts/charitable donations 24

25 Retirement Income Keep savings in retirement plan. Roll all or part to an IRA. Consider other savings or investment options. Cash out. What to do with retirement plan savings? You should consider the differences in investment options, fees and expenses, and tax and legal implications (creditor protections and required minimum distributions) when evaluating your choices. An IRA, like a qualified employer-sponsored plan, will have associated fees and expenses, which will be different for each option available to you. You should consult with a tax professional about the tax implications of each option. 25

26 Retirement Income Simplicity. Benefits of the plan Consolidation of multiple accounts. Continued access to plan s investment options and services. No early withdrawal penalty after age 55, if separated from service at age 55 or older. Allows you to defer tax burden of cash-out. You should consider the differences in investment options, fees and expenses, and tax and legal implications (creditor protections and required minimum distributions) when evaluating your choices. An IRA, like a qualified employer-sponsored plan, will have associated fees and expenses, which will be different for each option available to you. You should consult with a tax professional about the tax implications of each option. 26

27 Retirement Income IRA considerations Investment choice and flexible access to retirement funds. Consolidation of multiple retirement accounts. No early withdrawal penalty after age 59½. Allows you to defer the tax burden of cash-out. You should consider the differences in investment options, fees and expenses, and tax and legal implications (creditor protections and required minimum distributions) when evaluating your choices. An IRA, like a qualified employer-sponsored plan, will have associated fees and expenses, which will be different for each option available to you. You should consult with a tax professional about the tax implications of each option. 27

28 Retirement Income Other types of savings/ investment options Mutual funds Annuities Bank products You should consider the differences in investment options, fees and expenses, and tax and legal implications (creditor protections and required minimum distributions) when evaluating your choices. An IRA, like a qualified employer-sponsored plan, will have associated fees and expenses, which will be different for each option available to you. You should consult with a tax professional about the tax implications of each option. 28

29 Retirement Income Large tax burden. Why not cash out? There are other options. 29

30 Retirement Income Types of income GUARANTEED INCOME Products can supplement guaranteed income from Social Security, other sources Predictable income over time even a long period of time Protection from market volatility Investment options/choice not the focus VARIABLE INCOME Also a supplement to guaranteed income sources Variable instead of guaranteed because amounts may vary Investment control and options Flexibility in amounts you withdraw 30

31 Retirement Income Guaranteed income sources Income annuity (single premium immediate annuity). Deferred annuity with guaranteed living benefits. Guarantees are based on the claims-paying ability of the issuing insurance company. 31

32 Retirement Income Variable income sources Withdrawals from retirement accounts. Dividends from income generating mutual funds. Interest from bank products like CDs. Deferred annuities without guaranteed living benefits. 32

33 Retirement Income Next steps in creating income Maximize Savings Potential Help Reduce Volatility Optimize Income Potential MUTUAL FUNDS Equity funds Equity focused targetdate/risk funds Short-term fixed-income funds Money market funds* Fixed-income funds Short-term fixed-income funds ANNUITIES Variable annuities Fixed annuities Income annuities Variable annuities with guaranteed living benefits BANK SOLUTIONS (FDIC Insured) Long-term certificates of deposit (CDs) Money market accounts Savings accounts CDs CD laddering * An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund. 33 Q

34 Retirement Income Shift into a retirement income strategy Call your financial professional to schedule a personal visit. 34

35 What s Next? Consider increasing retirement plan contribution, consolidating retirement savings. Get an estimate of Social Security benefits. Think about options for retirement income. Schedule a 1 on 1 meeting with your financial professional. 35

36 These are only general guidelines, which may be helpful in making personal financial decisions. Responsibility for these decisions is assumed by you, not the Principal Financial Group or any of its member companies. The subject matter in this communication is provided with the understanding that The Principal is not rendering legal, accounting, or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements. Investing involves risk, including possible loss of principal. Principal Funds are distributed by Principal Funds Distributor, Inc. MM /2015 t Principal Financial Services, Inc. 36