When Your Outcome Needs to be Income

Transcription

1 When Your Outcome Needs to be Income A look at helping employees make good decisions about retirement income Don Harris VALIC Did you know? > In 1940, the first recipient of Social Security retirement benefits > Ida contributed $24.75 to Social Security and received more than $22,888 in benefit payments > She supplemented her Social Security check with apartment rental and stock income Ida May Fuller Contribution to SS: $24.75 Benefits from SS: $22,888 Will your Social Security benefits be enough if you live to be 100 or older? 2 Source: Historical Background and Development of Social Security. Social Security Administration; ssa.gov. Today s Discussion Why is this important? The new retirement realities The 5 risks of retirement Paying for retirement Essential income planning Where do we go from here? 3 1

2 Lets start with a simple question: WHY? Aging professors create a faculty bottleneck: At some universities, 1 in 3 academics are now 60 or older 60 and over 20.7 % Under % Cornell faculty by age Source: The Chronicle of Higher Education, March 18, 2012 Aging professors create a faculty bottleneck: At some universities, 1 in 3 academics are now 60 or older 60 and over 26 % Under % Cornell faculty by age Source: The Chronicle of Higher Education, March 18,

3 Aging professors create a faculty bottleneck: At some universities, 1 in 3 academics are now 60 or older 60 and over 34.5 % Under % Cornell faculty by age Source: The Chronicle of Higher Education, March 18, 2012 Is it modern art or a Rorschach test? Structure of US Population:

4 Structure of US Population: % 25% 20% Older Population by Age: Percent 60+, 65+, 85+ % 60+ % 65+ % % 10% 5% 0% Source: US Census Bureau, compiled by the U.S. Administration on Aging 1 The new retirement realities Reality is merely an illusion, albeit a very persistent one. Albert Einstein 4

5 Source: 11/2/2016 The new retirement realities Preparing for retirement Challenges Higher personal debt Longer life expectancy Greater responsibility to save Concern for the future of Social Security 13 The new retirement realities How confident are you about your retirement? 35% of U.S. workers are not confident they will have enough saved for a comfortable retirement. 24% of those with a retirement plan 57% of those without a retirement plan The 2016 Retirement Confidence Survey: Having a Retirement Savings Plan a Key Factor in Americans Retirement Confidence. EBRI, Issue Brief No. 413, April

6 What are the risks of retirement? Longevity Healthcare Investment Inflation Withdrawal Longevity risk People are living longer >The U.S. Census estimates over 66,000 centenarians 1 >Living in the city might add years to your life 2 >Pre-retirees are concerned about outliving their money >More time for various factors to affect retirement savings Sources: 1 Annual Estimates of the Resident Population by Single Year of Age and Sex for the United States: April 1, 2010 to July 1, U.S. Census Bureau, Population Division. Release Date: June Widening Rural Urban Disparities in Life Expectancy, U.S., American Journal of Preventive Medicine, January Longevity risk How to manage it: 1. Reduce living expenses 2. Save more 3. Adjust investment allocation 4. Work longer; retire later 18 6

7 2. Healthcare risk Expenses A married couple entering retirement today would need a median of $259,000 for a 90% chance of covering their healthcare expenses in retirement Source: Amount of Savings Needed for Health Expenses for People Eligible for Medicare: Some News Not So Rare Anymore. Monthly Newsletter. Vol. 36, No. 10. EBRI. October Healthcare risk The most common ways to pay for healthcare Medicare Self-insure Medicaid Long-term care insurance Healthcare risk The cost of long-term care $120,000 $100,000 $80,000 Median annual cost 2016 $105,784 $91,250 Inflation estimate in 2021 $93,090 $80,300 $60,000 $40,000 $20,000 $50,081 $53,048 $43,200 $45,760 $20,756 $17,904 $0 Adult Day Care Assisted Living Home Health Nursing Home Semi Private Nursing Home Private This chart shows the median annual cost for long-term care across the United States in 2015 at different centers of care and the five-year average annual cost at an assumed 3% inflation rate. Source: Cost of Long Term Care Survey, Genworth Financial,

8 Potential Return High 11/2/ Investment risk Asset classes, theoretical risk versus return Low Risk High Asset classes and indexes from which their historical returns are derived are not managed funds, have no identifiable objectives and cannot be purchased. They do not provide an indicator of how individual investments performed in the past or how they will perform in the future. Performance of indexes does not reflect the deduction of any fees and charges and past performance of asset classes does not guarantee the future performance of any investment. 3. Investment risk Risk tolerance Time horizon Asset allocation Diversification Key factors Current status, prior experience and emotional temperament Short-term preservation; Long-term appreciation Balance risk and reward within time horizon Across and within asset classes and reduce correlation Inflation risk Even modest inflation over time can have a major impact on your retirement Source: Average Price Data. Consumer Price Index, Bureau of Labor Statistics. August

9 5. Withdrawal risk Most common ways to withdraw funds from a tax-qualified retirement plan Lump-sum withdrawals Systematic withdrawals Rollovers Annuitization Withdrawal risk Lump-sum distribution Lump-sum amount $200,000 Initial 20% -$40,000 Additional income 8% -$16,000 Federal tax penalty = 10% (for early withdrawal if under age 59½) -$20,000 Total tax -$76,000 Total distribution $124,000 Assumes a 28% tax bracket Paying for retirement 9

10 Paying for retirement Harnessing the sources of retirement income Note: this is a hypothetical scenario and the sources of retirement income will vary depending on your individual situation. Source: Income of the Aged Population, Shares of Aggregate Income by Source, 1962 and Fast Facts and Figures About Social Security, SSA Publication No Released September Paying for retirement Common retirement income sources Working in retirement Pension/ employer retirement plan Personal savings/ other Social Security 29 Paying for retirement: changing expectations Retire before age 65 50% 43% 24% Retire at age 65 34% 27% 26% Age 66 or older/never 11% 32% 43% -EBRI and Matthew Greenwald & Assoc., 2016 Retirement Confidence Survey 10

11 Paying for retirement Expectation vs. reality Current worker - expectation Current retiree - reality 67% 76% 37% 15% 27% 25% Delay retirement Work in retirement Employment income Source: EBRI, Issue Brief No. 422, March, Paying for retirement: Social Security Annual earnings vs. benefits for workers retiring at age 65 [Replacement Ratios] Maximum-earner [<27%] High-earner [~34%] Mid-earner [~41%] Low-earner [ 55%+] Past earnings $31,668 $25,788 $47,820 $19,455 $21,519 $11,800 Benefits $76,512 $118,500 $19,868 Difference in benefits paid to highest and lowest earners Source: The 2016 Annual Report of The Board of Trustees of the Federal Old-age And Survivors Insurance and Federal Disability Insurance Trust Funds. SocialSecurity.gov. Paying for retirement Estimating your benefits Access the Social Security online calculator Source: SocialSecurity.gov. 11

12 Paying for retirement When will you need the most income in retirement? Annual spending Age Age Age 75+ % change Apparel & services $ 1,622 $ 1,287 $ % Entertainment $ 2,911 $ 2,413 $ 1,532-47% Food & alcohol $ 7,293 $ 6,200 $ 4,342-40% Healthcare $ 4,377 $ 5,259 $ 4,944 13% Housing $ 17,247 $ 15,076 $ 12,298-29% Transportation $ 9,519 $ 8,214 $ 4,468-53% Insurance & pensions $ 7,088 $ 2,904 $ % Miscellaneous $ 5,579 $ 4,615 $ 4,349-22% Total expenditures $55,636 $45,968 $33,530-40% Total expenditures for those age 75+ are 40% less than those aged Source: U.S. Department of Labor, Bureau of Labor Statistics, Consumer Expenditure Survey, Essential income planning Retirement: It's nice to get out of the rat race, but you have to learn to get along with less cheese. Gene Perret, comedy writer Essential income planning The essential expenses > Food > Shelter > Clothing > Healthcare > Transportation 36 12

13 Essential income planning Three-step process 3 Legacy Generational planning Non-essential Variable 2 income need income Mutual funds, Travel, leisure, hobbies Essential income need Food, shelter, clothing, transportation, healthcare annuities, MM, CDs, 1 managed accounts Income designed to last a lifetime Pension, Social Security, GMWB, annuitization, other Essential income planning Planning an income strategy Income Expenses How much income is from a pension or Social Security? Other fixed income sources? Annuities? Will I have earned income? Variable income from retirement savings and investments? Other sources of income or assets during retirement? How much money will you need in retirement? What essential expenses are fixed? For how long? Which essential expenses track inflation? What are your discretionary expenses? How much can I continue to save? 38 Essential income planning Filling the income gap - Annuities > Consider annuities as an option to turn assets into income you ll never outlive > What is an annuity? Contract with an insurance company Long-term investment for future income Principal and earnings grow tax deferred Provides income payments at regular intervals Can provide income for life, two lives and/or period certain > Guarantees backed by the issuing insurance company s claims-paying ability 39 13

14 Essential income planning Filling the income gap - GMWB What is a Guaranteed Minimum Withdrawal Benefit (GMWB)? > A GMWB is a rider purchased to ensure payments never fall below the amount guaranteed by your contract > Features typically include lifetime income at a set annual percentage > If you purchased the rider and your account value increases, you don t need to use the rider > Contract terms, payout options, fees and investment/age restrictions vary Guarantees are backed by the claims-paying ability of the issuing insurance company Withdrawals in excess of permitted free amounts may be subject to early withdrawal charges. Withdrawals are also subject to taxation as ordinary income and, if made prior to age 59½, may be subject to a federal early withdrawal penalty Where to go from here? You have to be careful if you don t know where you re going because you might not get there. Yogi Berra, baseball hall of famer Sign of the times? 14

15 What can Plan Sponsors do? Prepare Analyze workforce demographics Identify institutional risks & opportunities Carefully examine groups with highest individual risks Educate Build a communication & education plan to reach all demographics Illustrate the value of simple improvements Create a culture of financial awareness and financial wellness Encourage planning Create access and convenience Focus on participant outcomes Engage retirees, internal experts and business partners Where to go from here? Guide your employees to good decisions Consider > When do you plan to retire? > Will you continue to work in retirement? How long? > How is your health? Spouse or partner s health? > Is there a history/expectation of longevity? > Do you have a plan that guarantees your essential income needs will be met? 44 Where to go from here? Encourage employees to assess their financial situation > Identify their risks in retirement > Get a big picture view of your current financial situation > Help identify their financial goals and objectives > Create a budget to manage cash flow and meet financial goals > Create a budget for retirement years and integrate goals > Review plan regularly and adjust as needed 45 15

16 Looking ahead Social Changes: New attitudes Demographics Accommodation Technology Economic Changes: Social Security Inflation Market Volatility DB / DC transitions Planning, preparing and implementing for retirement Medical Advancements: Increased expectancy Longer productivity Healthcare costs Workplace Changes: Ongoing education & training Job sharing / seasonal help Managing grandparents Increased flexibility When Your Outcome Needs to be Income Thank you for participating! This information is general in nature and may be subject to change. All companies mentioned, their employees, financial professionals and other representatives are not authorized to give legal, tax or accounting advice. Applicable laws and regulations are complex and subject to change. Any tax statements in this material are not intended to suggest the avoidance of U.S. federal, state or local tax penalties. For advice concerning your individual circumstances, consult a professional attorney, tax advisor or accountant. Securities and investment advisory services offered through VALIC Financial Advisors, Inc., member FINRA, SIPC and an SEC-registered investment advisor. Annuities issued by The Variable Annuity Life Insurance Company. Variable annuities distributed by its affiliate, AIG Capital Services, Inc., member FINRA. For Plan Sponsor use only Copyright The Variable Annuity Life Insurance Company. All rights reserved. VALIC.com VC (03/2016) J86220 ER 16