Life in retirement: making your income last (resources to help your planning)

Transcription

1 Retirement Education Life in retirement: making your income last (resources to help your planning) Presented by: Ruth E. Maroun Senior Wealth Strategy Associate UBS Institutional Consulting Group - Northwest UBS Financial Services, Inc

2 Loma Linda University Health Care Retirement Education The information contained in this seminar presentation is intended to be general in nature. Neither UBS Financial Services Inc. nor any of its employees provide legal or tax advice, or investment advice to retirement plan participants. You must consult with your legal, tax and/or investment advisors regarding your personal circumstances. 2

3 Your LLUHC Retirement Team Investment consultants for retirement plan Help committee select & monitor funds Investment education for you Help you with retirement planning ongoing Help desk: record- Plan administration, keeping Quarterly statements & account access for you View investments anytime, & easy system for changes Account access: Toll-Free: or Plan custodian (for assets) Provide access to mutual funds via trading platform Invests your money based on your instructions (Executes your trades relayed via Milliman) 3

4 Changes to Plan Investments Week of October 30, 2017 Retirement plan committee meets regularly to select and monitor Plan investments - occasionally changes are made (e.g., underperforming fund may be replaced, fund(s) added, Plan qualifies for lower cost investments). Effective week of Oct. 30, 2017, the following changes will be made to the investments in the Plan: Investment Category Current Fund Replacement Fund Ticker Fund Family Website U.S. Equities Large Company: Value AlianzGI NFJ Dividend Value Instl T. Rowe Price Value I TRPIX Medium Company: Value Goldman Sachs Mid Cap Value Instl JP Morgan Mid Cap Value R6 JMVYX Medium Company: Growth Ivy Mid Cap Growth Y Vanguard Mid-Cap Growth Index Admiral VMGMX Small Company: Value Royce Pennsylvania Mutual Invmt Goldman Sachs Small Cap Value R6 GSSUX Small Company: Blend Vanguard Small Cap Index Adm Vanguard Small Cap Index I VSCIX Total U.S. Stock Market Fidelity Total Market Index Investor Fidelity Total Market Index Premium FSTVX International Equities Fidelity International Index Investor Fidelity International Index Premium FSIVX 4

5 Your LLUHC Retirement Plan 5

6 LLUHC Retirement Plan Your Retirement Plan consists of two parts: 1) MERP employer annual contributions (discretionary) All eligible employees are automatically enrolled and Loma Linda makes contributions to your account 2) TSA - 403(b) employee elective salary deferrals You choose to enroll and decide how much to save from your paycheck 6

7 LLUHC MERP 1) MERP - Employer Annual Contribution (discretionary): Eligibility you must be at least 20 years old and work at least 1,000 hours during the plan year Enrollment all eligible employees are automatically enrolled in the Plan on the date of hire (or the date they turn 20 years old) Amount of discretionary contribution announced by March 15 th for the previous year; deposited to your account no later than Sept. (e.g., receive contribution for 2016 plan year in 2017) Broad range of investment choices 7

8 Vesting Schedule for MERP Contributions Vesting is when LLUHC s or your participating employer s contributions belong to you! Years of Vested Service Interest Less than 1 0% 1 20% 2 40% 3 60% 4 80% 5 or more 100% You will become vested in your account immediately if you are employed at LLUHC and reach age 65, or due to disability or death. You re always 100% vested in your TSA - 403(b) salary deferrals and any rollovers from other qualified plans. 8

9 Elective Salary Deferrals (TSA-403b) 2) TSA 403(b) Employee Elective Salary Deferral: Eligibility 1 st of the month following your date of hire Employee payroll deduction tax advantaged You choose how much you want to save from your paycheck Current tax savings (i.e., pre-tax contributions) or after tax savings (i.e., Roth) your choice, details to follow Automatic saving & investing is easier! Contribution limits: 1-90% of your income to $18,000 in 2017 ($18,500 in 2018) 50 & Over Catch-Up of $6,000 more in 2017 ($6,000 in 2018) (total $24,000 in 2017; $24,500 in 2018) You may change your contribution rate at any time (VRU or website) Broad range of investment choices 9

10 Your Contributions: Pre-tax, ROTH or Both? Traditional 401(k) = Pay Taxes Later Pre-tax contribution Tax-deferred accumulation Pay taxes at distribution ROTH 401(k) = Pay Taxes Today After-tax contribution Tax-free accumulation* You may choose pre-tax &/or ROTH for your contributions Company contributions are pre-tax * Requires minimum of 5 years + age 59 ½ before distribution This data is taken from sources deemed to be reliable, but we cannot guarantee their accuracy nor completeness. 10

11 Accumulation vs. Distribution Phases of Retirement Management Accumulation Phase Distribution Phase Full S.S Eligibility Early S.S. eligibility IRA required minimum distribution age age 20 age 30 age 40 age 50 age 60 age 62 age age 70.5 age 80 age 90 Retirement Assets Note: Social Security full eligibility age is increasing and depends on birth year. Source: UBS Investment Research provided through UBS Securities LLC (2004) 11

12 How Do You Manage One "Paycheck" to Make it Last a Lifetime? Before retirement Salary Investment income Other sources Monthly expenses Discretionary spending Savings and investments After retirement Retirement plan and IRA distributions Other assets Social Security Lifetime expenses Lifetime discretionary spending 12

13 Life Expectancy Probabilities If you're 65 today, the probability of living to a specific age or beyond 13

14 Reasons to Save for Retirement The impact of inflation on your money (higher prices) Item 1980 Current First-Class Stamp $0.15 $ TV Guide $0.40 $ Loaf of Bread $0.52 $ Average New Car $7,571 $32,890 4 Average New Home $64,600 $290,000 5 College Education $4,806 $18,391 6 (4-year public annual tuition and room and board) 1 As of March Cover price, March U.S. Bureau of Labor Statistics, April Kelley Blue Book, December U.S. Census Bureau, March Trends in College Pricing 2013, The College Board s Annual Survey of Colleges,

15 Inflation Impact on Lifestyle Expenses Often overlooked, inflation can have a dramatic effect on assets needed to cover retirement lifestyle expenses 20-year Period Retirement Expenses: First year Retirement Expenses: 20 years later $60,000 $94, $60,000 $189, $60,000 $184, $60,000 $108,600 Source: U.S. Department of Labor, Bureau of Labor Statistics Inflation calculator 15

16 Health Care: Medicare and Medi-gap Supplemental Insurance 16

17 Health Care Costs 17

18 Medicare Basics ( Medicare is health care insurance for people age 65 or older Medicare Part A (Hospital Insurance) Helps cover inpatient care in hospitals (includes hospitals, inpatient rehabilitation, and longterm care hospitals) Helps cover skilled nursing facility (not custodial or long-term care), hospice and home health care services You usually don t pay a monthly premium for Part A coverage if you or your spouse paid FICA taxes (includes Medicare) for 40 calendar quarters (10 years) Enrolling in Medicare Part A is automatic with Social Security benefits (unless you delay Social Security beyond age 65) Medicare Part B (Medical Insurance) Helps cover doctor services and outpatient care Helps cover some preventive services to help maintain health and to keep certain illnesses from getting worse You have to pay a premium to enroll in Medicare Part B (usually deducted from Social Security benefits) the current standard monthly premium is $134 per person (can be higher or lower depending on taxable income) 18

19 Medicare Basics ( Medicare is health care insurance for people age 65 or older Medicare Part C (Medicare Advantage Plans) A way to get Medicare benefits through private companies approved by and under contract with Medicare Includes Part A, Part B, and usually other benefits Medicare doesn t cover Most plans also provide prescription drug coverage Medicare Part D (Prescription Drug Coverage) Run by private companies approved by Medicare, either Medicare Advantage Plans or separate Medicare Prescription Drug Plans Helps cover the cost of prescription drugs Each plan can vary in cost and drugs covered higher-income consumers may pay more Medicare Counseling Statewide Health Insurance Befits Advisors (SHIBA) offers free, unbiased Medicare counseling Call SHIBA at Additional information at 19

20 Other Health Care Issues Medigap (Supplemental Insurance) Policies A Medigap policy is health insurance sold by private insurers to fill the gaps in Original Medicare Plan coverage Medigap policies help pay some of the health care costs the Original Medicare coverage doesn t cover If you are in the Original Medicare Plan and have a Medigap policy, then both will pay covered health care costs You can choose from twelve (12) different standardized Medigap policies (Medigap Plans A through L), each with a different set of basic and extra benefits (dozens of Medicare Advantage insurance carriers) Generally when you buy a Medigap policy you must have Medicare Part A & B you will have to pay the monthly Part B premium as well as the Medigap policy premium You and your spouse must each buy separate Medigap policies 20

21 Medicare Coverage Choices ( STEP 1: Decide how you want to get your coverage "Original Medicare" or Medicare Advantage Plan (MA) Part A Hospital Insurance Part B Medical Insurance Part C (like an HMO or PPO) Combines Part A, Part B, and usually Part D STEP 2: Decide if you want or need to add drug coverage Part D Prescription Drug Coverage STEP 3: Decide if you need to add supplemental coverage Medigap: Medicare Supplement Insurance Part D Prescription Drug Coverage (Most MA plans cover prescription drugs. You may be able to add drug coverage in some plans if not already included.) If you join a MA plan, you can't use and can't be sold a Medigap or Medicare Supplemental Insurance. This data is taken from sources deemed to be reliable, but we cannot guarantee their accuracy nor completeness. 21

22 Medicare Selection Tools at Medicare.gov Medicare choices can seem complicated, but there are tools available at medicare.gov to help you with your research. Other resources include SHIBA, a volunteer service noted on Slide

23 Social Security: Maximize by Delaying 23

24 Social Security Basics ( Maximize Your Income by Delaying Benefits For most people Social Security replaces 25-45% of income To receive full benefits you need to have paid FICA 1 taxes for 35 years Basic eligibility requires a minimum of 40 quarters (10 years) with $1,300 in covered earnings each quarter You will receive reduced benefits if you start benefits before your full retirement age (FRA, sometimes called normal retirement age or NRA) Starting benefits after your FRA will increase your lifetime income (at least up to age 70) Your spouse receives a separate income, based on the greater of his / her own earnings or 50% of your benefit (often called spousal benefit ) The current average monthly benefit is $1,360 and is adjusted for inflation 1 Federal Insurance Contributions Act (Social Security + Medicare) 24

25 Social Security Basics Social Security pays a monthly income for life, and continues for your spouse Your income is adjusted for inflation (most private pensions aren t) Social Security benefits are not affected by the economy or the stock market Social Security Full Retirement Age (FRA) If you were born in Then your FRA (or NRA) is 1937 or earlier 65 years years, 2 months years, 4 months years, 6 months years, 8 months years, 10 months years years, 2 months years, 4 months years, 6 months years, 8 months years, 10 months 1960 or later 67 years 25

26 Maximize Social Security Benefits by Waiting Taking benefits too early Avoid starting Social Security benefits too early Half of all Americans start taking benefits at age 62, the earliest possible age that generates the lowest amount of monthly income Forfeiting benefits If you're working between 62 & full retirement age (FRA) at ages then you will forfeit part of the Social Security benefit until you reach FRA Waiting = growth Each year after FRA your benefit grows by 8% per year The data is taken from sources believed to be reliable but we cannot guarantee their accuracy nor completeness 26

27 The Value of Waiting: Up to 8% Per Year Waiting 4 years provides $1,795 $435 more a month for life $1,020 $1,360 Waiting 8 years provides $775 more a month for life (76% more) (Courtesy of Fidelity Social Security Presentation, December, 2015) 27

28 Social Security and Working Working while taking Social Security early has its drawbacks $16,920 $44,880 Income limits are as of 2017 (subject to change) This data is taken from sources deemed to be reliable, but we cannot guarantee their accuracy nor completeness. 28

29 Federal Tax on Benefits Provisional Income You may request federal tax withholding from your benefits. Currently these income limits are fixed and are not adjusted for inflation. This data is taken from sources deemed to be reliable, but we cannot guarantee their accuracy nor completeness. 29

30 Distributions: Spending and Investment Strategy 30

31 Lifetime Income Sources and Expenses Match sources of income with category of expenses Income Sources Social Security Pension Earned Income Other (annuities, reverse mortgage, etc.) Personal Investments: Tax Deductible Tax-Deferred After Tax Cash Flow Budget Lifestyle Expenses Essential Needs Housing Health Insurance Food/Living Expenses Lifestyle Needs Travel Entertainment Hobbies/Leisure 31

32 Retirement Planning Example If working income = $40,000/yr. 70% retirement income = $28,000/yr. Approx. half is Social Security = $14,000 Approx. half is from 401(k)/other = $14,000 Requires approximately $350,000 in assets to generate $14,000/year at 4% spending rates * The Milliman website tool (PlanAhead) can help you determine if you are on track. If not, it can help you consider changes to your strategy (work longer, more saving, etc.) * These calculations provide only a simple example outcomes are not guaranteed. Each participant's situation is unique and requires specific planning needs. The data is taken from sources believed to be reliable but we cannot guarantee their accuracy nor completeness 32

33 Retirement Income Challenge Understand Key Risk Considerations Longevity Living longer than one s savings Inflation Decrease in real purchasing power, income needs rise to keep pace Drawdown Real rate of withdrawal may deplete assets prematurely Healthcare Rising Costs associated with medical care and extended long-term care Market Expected returns on investments not realized 33

34 Timing is Everything What If You Encounter Weak Financial Markets Early in Retirement? $500,000 at Retirement Invested in 50% Stocks, 50% Bonds Annually, With a 5% Real Annual Withdrawal Rate at Varying Starting Points Average Note: Transaction costs are not included. Source: Ibbotson, UBS period illustrates the devastating combination of low returns and high inflation even worse than 1929 period when portfolios dropped by 45% in four years, but rebounded to last 32 years after retirement. 2 (Past performance does not guarantee future results) 34

35 Spending Rates godear [printed: ] [saved: ] Presentation1 Given a life expectancy of 20+ years in retirement, a fixed withdrawal rate that is inflation adjusted may not last as long as needed $600,000 $500,000 $400,000 $300,000 $200,000 $100,000 $0 9% 8% 7% 6% 5% 9% Withdrawal Rate 8% Withdrawal Rate 7% Withdrawal Rate 6% Withdrawal Rate 5% Withdrawal Rate Hypothetical value of $500,000 invested at year-end Portfolio represents 50% Large Company Stocks, 50% Intermediate-Term Bonds. Assumes reinvestment of income and has been adjusted for inflation, but does not take into account transaction costs, fees, taxes or other expenses an investor would normally incur. Indexes are unmanaged. You cannot invest directly in an index. Source: Ibbotson Presentation Materials, Ibbotson Associates, Inc. All rights reserved. Used with permission. 35

36 Real Withdrawal Rate Which Will Last Longer My Money or Me? Probability of Outliving Your Retirement Assets in a 25-Year Retirement Stock/Bond Allocation (%) 100/0 80/20 60/40 40/60 20/80 0/100 2% 0.8% 0.3% 0.1% 0.0% 0.0% 0.1% 3% % % % % % % % Source: UBS Quantitative Research Team (2004) based on historical return data for large-cap stocks and long-term Treasury bonds (from ) This hypothetical example is provided for illustrated purposes only and is not intended to represent a specific investment or portfolio. 36

37 Preparing Your Portfolio for What s to Come Planning points the way to: Creating a budget and balance sheet Identifying income gaps and sources Developing and evaluating a portfolio Update your beneficiary designation 37

38 Conventional Asset Drawdown Methodology Savings Hierarchy Pre-Tax 401(k)/403(b)/457 IRA PS/MP/DB SEP SIMPLE HSA After-Tax Tax-Deferred IRA Roth Annuities Non-Qualified Plans After-Tax Taxable Stocks Bonds Mutual Funds Using Hierarchy Address Income Gap 38

39 Retirement Income Strategy-Approach Financial Planning Budgeting Cash Flow Projection Gap Analysis (Projections vs. Goals) Mapping of Planning Solutions (reduce expenses, retire later, save more) Implementation Review Investment Management Strategy Address Income Needs Long Term View Asset Allocation and Diversification Rebalancing Ongoing Review 39

40 Your Retirement Plan s Investments One-Step Mix ( instant diversification ) Choose Your Own Mix Balanced T. Rowe Price Retirement Date Funds Investment Category Money Market/Stable Value/ (Cash) Bonds (Fixed Income) Investment Options American Funds Money Market (TSA only) ColumbiaTrust Stable Income IV (MERP only) Vanguard Short-Term Bond Index Vanguard Inflation-Protected Securities PIMCO Total Return US Equity Large Company: Value T. Rowe Price Value Index Vanguard Institutional Index Blend American Funds Fundamental Investors Growth Columbia Select Large Cap Growth All-Cap Index Fidelity Total Market Index Medium Company: Value JP Morgan Mid Value Blend Eagle Capital (MERP only) Growth Vanguard Mid Cap Growth Index Small Company: Value Goldman Sachs Small Cap Value Index Vanguard Small Cap Index Growth Hartford Small Cap Growth Specialty: Real Estate International Equity Value Growth Index Blend Cohen & Steers Realty Shares Brandes International (MERP only) Oppenheimer International Growth (MERP only) Fidelity International Index (both plans) American Funds Europacific Growth (TSA only) * All investment options are mutual funds except Eagle Capital and Brandes Int'l. which are separately managed accounts. 40

41 One-Step Mix Adjusts Over Time The Retirement Date Funds are a diversified portfolio of T. Rowe Price stock and bond funds that represent various asset classes and sectors. As the fund nears its target retirement date, its allocation becomes more conservative based on a "glide path" similar to the one below. Real Assets Inflation Focused Bonds Int'l Stocks Int'l & High Yield Bonds US Investment-Grade Bonds US Stocks 41 (This information has been obtained from sources believed to be reliable, but we cannot guarantee it s accuracy or completeness Past performance does not guarantee future results.)

42 Target Retirement Date Funds Performance (as of 9/30/17) 42

43 Core Mutual Funds Performance (as of 9/30/17) 43

44 Need Help? Do you have questions regarding? Account Access/Website (including investment changes, forms, retirement calculators, etc.) Milliman (plan administrator) or Investments/Retirement Planning (no account access) UBS Institutional Consulting Financial Wellness Website (budgeting, credit, student loans, etc.) 44