MAAC April 16, Steve Vernon, FSA President, Rest- of- Life Communica=ons

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1 MAAC April 16, Steve Vernon, FSA President, Rest- of- Life Communica=ons

2 The work of science is to subs=tute facts for appearances and demonstra=ons for impressions.

3 The essen=al difference between emo=on and reason is that emo=on leads to ac=on while reason leads to conclusions. DONALD CAINE, NEUROLOGIST 3

4 Challenge #1 People don t plan

5 Before we dig in, here s a lisle mo=va=on How much life do we have leu? 5

6 There s a lot at stake! Average life expectancy for males RP mortality table 6

7 There s a lot at stake! Average life expectancy for females 7

8 Ge?ng it right can add 5 to 7 years! Life expectancy for males; same effect for females 8

9 Ge?ng it wrong can subtract 5 to 7 years! Life expectancy for males; same effect for females 9

10 There s a 10 to 13 year spread between ge?ng it right and ge?ng it wrong! Life expectancy for males; same effect for females 10

11 Workers have lower death rates than re=rees! Death rates for males 11

12 What s Your Life Expectancy? Some good websites:

13 Many Americans Lack Necessary Financial Management Skills Methods for Determining Savings Needed for Retirement Guess 42% Do own estimate 21% Ask advisor 21% Read or hear amount 9% Online calculator 7% Source: EBRI 2011 Retirement Confidence Survey

14 Respondents Underestimate Amount Needed for Comfortable Retirement Under $250,000 34% $250,000 - $499,999 18% $500,000 - $999,999 20% $1 million or more 15% Don t know 10% Source: EBRI 2012 Retirement Confidence Survey

15 !!! The Basic Messages Manage the magic formula I > E 15

16 The Basic Messages Protect against things going wrong Plan for a good life 16

17 !!! Things That Can Go Wrong Significant Re=rement Risks " High medical bills Poor health Ruinous long- term care expenses Death of a spouse Investment losses " 17

18 Challenge #2 Not Enough Money Reported retirement savings age % less than $50,000 12% $50,000 - $99,000 18% $100,000 - $249,999 22% $250,000 + Source: EBRI 2012 Retirement Confidence Survey Annual retirement income generated by 4% withdrawal percentage $50,000 => $2,000 $100,000 => $4,000 $250,000 => $10,000

19 An Exercise in U=lity Theory Customer sa=sfac=on ra=ngs Toyota Corolla Toyota Camry Lexus EX Lexus GX Source: JD Powers & Associates 19

20 An Exercise in U=lity Theory What price for sa=sfac=on? 50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 Toyota Corolla Price Toyota Camry Lexus EX Lexus GX Sa=sfac=on Toyota Corolla Toyota Camry Lexus EX Lexus GX

21 " " Buy just enough to meet your needs and what truly makes you happy 21

22 Challenge #3 People take Social Security too early

23 Your Lifetime Social Security Income Depends on When You Start and How Long You Live Start Social Security at: Initial annual income: Live to 70, total lifetime income: Live to 80, total lifetime income: Live to 90, total lifetime income: 62 (earliest) 66 (FRA) 70 (latest) $17,700 $23,940 $32,100 $141,600 $95,760 $0 $318,600 $335,160 $321,000 $495,600 $574,560 $642,000 Best strategy if you die at 70 Best strategy if you die at 80! Single person earning $75,000/year in 2012, born 1950 ignores CPI benefit increases in future years Best strategy if you die at 90"!

24 Break- Even Ages at Death for the Social Security Start Early and Invest Strategy If Joe earns: He needs to die before age: 5% per year 82 6% 84 7% 86 8% 89

25 Challenge #4 Reliance on 401(k) Plans for Re=rement Income Most Par=cipants Lack Formal Plan for Managing Re=rement Income Formal plan No plan Source: LIMRA presentaoon,

26 Most Par=cipants Draw As Needed from Re=rement Savings Surveys of how par=cipants draw down re=rement savings Society of Actuaries study Most frequent response: draw as needed to meet living expenses (36% re=rees, 39% pre- re=rees) Only good answer: 17% re=rees, 11% pre- re=rees say only spend investment income Vanguard study Most frequent response: 37% draw as needed to meet living expenses 21% no formal approach 10% gut feel Less than one in 10 have formal withdrawal rule " 26

27 How to Plan like Mr. Spock " Overall strategy Set up a systema=c withdrawal method to provide a monthly income that lasts for life and increases with infla=on. Live paycheck to paycheck. Don t spend more than your monthly income. Major tradeoffs Flexibility and control over assets vs. certainty of life=me income Amount of re=rement income needed 27

28 Use 401(k)/IRAs/Re=rement Savings to Generate Life=me Income Three withdrawal methods to meet strategy 1. Invest in balanced porqolio, withdraw only interest and dividends 2. Managed payouts or installments - invest in balanced porqolio, withdraw cau=ously to avoid running out of money 3. Buy an immediate annuity Each has pros and cons, each has several varie=es May be desirable to combine methods, or change over =me 28

29 Re=rement Income Scorecard Annual income generated by $100,000 Re=rement income generator Payout Rate Variable annuity Fixed annuity Managed payouts $4,000 $5,951 $5, % 5.8% 4.0% Infla=on- adj annuity $3, % Investment income $3,000 $0 $2,000 $4,000 $6, % Married couple age 65 January, 2012

30 Rating the Retirement Income Generators How important are the LIFE goals to you? L I F E Longevity protection Inflation protection Flexibility, inheritance Exposure to volatility = Not important 2 = Moderately important 3 = Very important

31 Par=cipants may be withdrawing too much from re=rement savings Report from Na=onal Bureau of Economic research: Many don t withdraw from IRA/401k) before RMD at age 70-1/2 For those withdrawing, average withdrawal over 8% for ages (withdrawal rate increases as balance decreases) 2011 Wells Fargo study reports median annual withdrawal rate of 8% 4% withdrawal rate considered safe 4% ques=oned lately given low interest rates, underperformance, and investment fees 31

32 Par=cipants may be withdrawing too much from re=rement savings Annual W/D rate Household assets <$100k $100- $250k $250k- $500k $500k Source: LIMRA presenta=on,

33 Withdrawal rate Odds of Ruin with Various Withdrawal Rates 30 year re=rement 4.9% 20% 4.3% 10% 3.9% 5% 0% 5% 10% 15% 20% 25% Odds of ruin, calculated by Wade Pfau, Ph.D 50/50 porqolio

34 Sustainable Withdrawal Rate an Important Woman s Issue 70% of elderly with incomes below poverty level are women Half of elderly widows weren t poor un=l their husbands died Women less likely to have pension income, more likely to be caregivers Source: Administra=on on Aging 34

35 Challenge #5 People aren t saving enough

36 Many Americans Lack Necessary Financial Management Skills Methods for Determining Savings Needed for Retirement Guess 42% Do own estimate 21% Ask advisor 21% Read or hear amount 9% Online calculator 7% Source: EBRI 2011 Retirement Confidence Survey

37 How Much Should You Save? As much as you can, plus 1% The maximum matched by your employer 15% of pay Refined method: use worksheets or souware Or try the Re=rement Savings Menu 37

38 Challenge #6

39 Challenge #6

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42 ?? Ques=ons?? and Discussion! Learn more and stay in touch - newsleser steve.vernon@restoflife.com 12 weeks to plan your re=rement 42

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