RETIREMENT PLANNING. Created by Raymond James using Ibbotson Presentation Materials 2011 Morningstar, Inc. All rights reserved. Used with permission.

Transcription

1 RETIREMENT PLANNING Erik Melville 603 N Indian River Drive, Suite 300 Fort Pierce, FL erik.melville@raymondjames.com Created by Raymond James using Ibbotson Presentation Materials 2011 Morningstar, Inc. All rights reserved. Used with permission.

2 RETIREES FACE NUMEROUS RISKS Withdrawals What rate is sustainable? Sequencing by tax bracket Managing RMDs Longevity Long retirement horizons a couple aged 65 has 25% chance of a survivor living to age 96 Retiree Spending Replacement ratio Essential versus lifestyle expenses Medical expenses Retirement income Solvency Pension plans and retiree benefits a thing of the past Social Security and Medicare Market Volatility Uncertain returns and income Impact of point in time Asset allocation and location Inflation Erodes the value of savings and reduces returns Health-care inflation 4.3% Savings Under-funded defined contribution accounts Most Americans have an enormous savings gap Created by Raymond James using Ibbotson Presentation Materials 2011 Morningstar. All Rights Reserved. 3/1/2011

3 Retirees Face Numerous Risks CLIENT SOLUTIONS PLANNING FOR RETIREMENT Withdrawals What rate is sustainable? Sequencing by tax bucket Managing RMDs Longevity Long retirement horizons a couple aged 65 has 25% chance of a survivor living to age 96 Retiree Spending Replacement ratio Essential versus lifestyle expenses Medical expenses RETIREMENT INCOME Solvency Pension plans and retiree benefits a thing of the past Social Security and Medicare Market Volatility Uncertain returns and income Impact of point in time Asset allocation and location Inflation Erodes the value of savings and reduces returns Healthcare inflation 6%+ Savings Underfunded defined contribution accounts Most Americans have an enormous savings gap. Past performance is no guarantee of future results. An investment cannot be made directly in an index. This art is for illustrative purposes only and not indicative of any investment. Source: Created by Raymond James using Ibbotson Presentation Materials 2008 Morningstar, Inc. All rights reserved. Used with permission. 3

4 Some Key Questions We Can Help You Address CLIENT SOLUTIONS PLANNING FOR RETIREMENT Do I have enough assets to retire? How much income will I need in retirement? Am I saving enough today? Is my portfolio set up to address longevity risk? Which account should I take income from first, my IRA or taxable accounts? Am I taking enough risk in my portfolio given the effects of inflation? Should I leave my retirement plan at my employer or roll it over to an IRA? Should I convert to a Roth IRA? There is no assurance any investment strategy will be successful. Investing involves risk and investors may incur a profit or a loss. 4

5 SOURCES OF RETIREMENT INCOME 17.8% 1.9% Earned Income Social Security Pension Investment Income Other 43.7% 17.9% 18.7% 17.8% 1.9% 43.7% 18.7% 17.9% Pension includes all defined benefit and defined contribution plans. Estimates are not guaranteed. Created by Raymond James using Ibbotson Presentation Materials Morningstar. All Rights Reserved. 3/1/2011

6 EMPLOYERS ARE CUTTING DEFINED BENEFIT PENSION PLANS NUMBER OF DEFINED BENEFIT PLANS k Created by Raymond James using Ibbotson Presentation Materials 2011 Morningstar, Inc. All rights reserved. Used with permission.

7 THEN AND NOW ASSET ALLOCATION BEFORE AND AFTER RETIREMENT Before Retirement Accumulation Long-term growth Current savings Time to recover Tax-deferred growth After Retirement Disbursement Long-term growth Current income Downturns immediately felt Minimum required distributions Taxes Created by Raymond James using Ibbotson Presentation Materials 2011 Morningstar. All Rights Reserved. 3/1/2011

8 RETIREES SHOULD PLAN FOR A LONG RETIREMENT PROBABILITY OF A 65-YEAR-OLD LIVING TO VARIOUS AGES 100% Male Female At Least One Spouse Years Old Source: Annuity 2000 Mortality Tables. Created by Raymond James using Ibbotson Presentation Materials 2011 Morningstar. All Rights Reserved. 3/1/2011

9 PERSONAL SAVINGS EXPECTED TO PLAY A LARGER ROLE IN RETIREMENT SURVEY OF RETIREMENT INCOME SOURCES 100% 96% Workers (Expected) Retirees (Reported) 80 77% 75% 78% 77% 60 56% 52% 58% 40 44% 20 23% 0 Social Security Employer-Sponsored Retirement Savings Plan (Ex. 401k) Employer-Provided Traditional Pension Plan Other Personal Savings/Investments (Incl. IRA) Employment Source: Employee Benefit Research Institute, 2010 Retirement Confidence Survey. Created by Raymond James using Ibbotson Presentation Materials 2011 Morningstar. All Rights Reserved. 3/1/2011

10 SOCIAL SECURITY IS UNDER STRAIN NUMBER OF BENEFICIARIES PER 100 COVERED WORKERS High Cost Intermediate Low Cost 10 Historical Estimated Low-cost assumes relatively rapid economic growth, low inflation, and favorable (from the standpoint of program financing) demographic and program-specific conditions; Intermediate represents the Trustees best estimates of likely future demographic, economic, and program-specific conditions; High-cost assumes relatively slow economic growth, high inflation, and unfavorable demographic and program-specific conditions. Created by Raymond James using Ibbotson Presentation Materials Morningstar. All Rights Reserved. 3/1/2011

11 INFLATION SIGNIFICANTLY ERODES PURCHASING POWER OVER TIME EFFECTS OF 3% INFLATION ON PURCHASING POWER $100k $85, $73,742 $63, $54,379 $46,697 $40, Years Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. Created by Raymond James using Ibbotson Presentation Materials 2011 Morningstar. All Rights Reserved. 3/1/2011

12 INFLATION AND TAXES REDUCE RETURNS COMPOUND ANNUAL RETURNS % Stocks 9.9% Bonds Cash % 5.5% 4 4.7% 3.6% 2 2.4% 0.4% 0.6% 0-0.7% -2 Return After Inflation After Taxes & Inflation Return After Inflation After Taxes & Inflation Return After Inflation After Taxes & Inflation Past performance is no guarantee of future results. An investment cannot be made directly in an index. Assumes reinvestment of income and no transaction costs. Inflation rate over the time period was 3.0%. This is for illustrative purposes only and not indicative of any investment. Created by Raymond James using Ibbotson Presentation Materials 2011 Morningstar. All Rights Reserved. 3/1/2011

13 SUSTAINABLE WITHDRAWAL RATES VARY OVER TIME ROLLING 30-YEAR PERIODS % 10 75% Stocks/25% Bonds 50% Stocks/50% Bonds 25% Stocks/75% Bonds Jan 1926 Dec Past performance is no guarantee of future results. An investment cannot be made directly in an index. This is for illustrative purposes only and not indicative of any investment. Created by Raymond James using Ibbotson Presentation Materials 2011 Morningstar. All Rights Reserved. 3/1/2011

14 WITHDRAWAL RATE YOU CAN SUSTAIN MAY BE LOWER THAN YOU THINK AVERAGE: % 6.14% % 4.44% % Stocks/25% Bonds 50% Stocks/50% Bonds 25% Stocks/75% Bonds Past performance is no guarantee of future results. An investment cannot be made directly in an index. This is for illustrative purposes only and not indicative of any investment. Created by Raymond James using Ibbotson Presentation Materials 2011 Morningstar. All Rights Reserved. 3/1/2011

15 THE SEQUENCE OF RETURNS CAN SIGNIFICANTLY AFFECT YOUR RETIREMENT SEQUENCE OF RETURNS MATTERS $500k Actual Historical Return Sequence Reversed Historical Return Sequence $2.5 mil Aug Past performance is no guarantee of future results. An investment cannot be made directly in an index. Hypothetical value of $500,000 invested at the beginning of 1973 and August Assumes inflation-adjusted withdrawal rate of 5%. Portfolio: 50% large-company stocks/50% intermediate-term bonds. This is for illustrative purposes only and not indicative of any investment. Created by Raymond James using Ibbotson Presentation Materials 2011 Morningstar. All Rights Reserved. 3/1/2011

16 DISCUSSION OF SIMULATION CRITERIA AND METHODOLOGY Many of the following images were created using Monte Carlo parametric simulation. This model estimates the range of possible outcomes based on a set of assumptions including arithmetic mean (return), standard deviation (risk), and correlation for a set of asset classes. The inputs used herein are the historical figures. The risk and return of each asset class, cross-correlation, and annual average inflation over this time period follow. Stocks: risk 20.4%, return 11.9%; Bonds: risk 5.7%, return 5.5%; Correlation 0.01; Inflation: return 3.1%. Note that other investments not considered may have characteristics similar or superior to those being analyzed. Each simulation produces 35 randomly selected return estimates consistent with the characteristics of the portfolio to estimate the return distribution over a 35-year period. Each simulation is run 5,000 times, to give 5,000 possible 35-year scenarios. A limitation of the simulation model is that it assumes the distribution of returns is normal. Should actual returns not follow this pattern, results may vary. Created by Raymond James using Ibbotson Presentation Materials 2011 Morningstar. All Rights Reserved. 3/1/2011

17 INTERPRETING CONFIDENCE LEVELS IN SIMULATION Confidence Level Chance of Exceeding Chance of Falling Short 50% 50% 50% 75% 75% 25% 90% (More conservative) 90% 10% This table is intended to help interpret 50%, 75%, and 90% confidence levels illustrated in the following images. Created by Raymond James using Ibbotson Presentation Materials 2011 Morningstar. All Rights Reserved. 3/1/2011

18 SIMULATION CAN ILLUSTRATE THE PROBABILITY OF ACHIEVING OUTCOMES A VISUAL INTERPRETATION OF CONFIDENCE LEVELS IN SIMULATION $10 Mil 1 Mil 100k 50% Confidence Level 75% Confidence Level 90% Confidence Level 10k 65 Years Old An investment cannot be made directly in an index. IMPORTANT: Projections generated by Morningstar regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Results may vary over time and with each simulation. This is for illustrative purposes only and not indicative of any investment. Created by Raymond James using Ibbotson Presentation Materials 2011 Morningstar. All Rights Reserved. 3/1/2011

19 HIGH WITHDRAWAL RATES WILL QUICKLY DEPLETE YOUR ASSETS SIMULATED PORTFOLIO VALUES (90% CONFIDENCE LEVEL) $1 Mil 500k Withdrawal Rate: 8% 7% 6% 5% 4% 65 Years Old An investment cannot be made directly in an index. IMPORTANT: Projections generated by Morningstar regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Results may vary over time and with each simulation. This is for illustrative purposes only and not indicative of any investment. Created by Raymond James using Ibbotson Presentation Materials 2011 Morningstar. All Rights Reserved. 3/1/2011

20 MARKET PERFORMANCE AFFECTS CHANCE OF PORTFOLIO SHORTFALL SIX PERCENT INFLATION-ADJUSTED WITHDRAWAL AT THREE CONFIDENCE LEVELS $1 Mil 500k 50% Confidence Level 75% Confidence Level 90% Confidence Level Years Old An investment cannot be made directly in an index. IMPORTANT: Projections generated by Morningstar regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Results may vary over time and with each simulation. This is for illustrative purposes only and not indicative of any investment. Created by Raymond James using Ibbotson Presentation Materials 2011 Morningstar. All Rights Reserved. 3/1/2011

21 POTENTIAL SHORTFALL: THE RISK OF HIGH WITHDRAWAL RATES ANNUAL INFLATION-ADJUSTED WITHDRAWAL AS A % OF INITIAL PORTFOLIO WEALTH $500k Withdrawal Rate: 9% 8% 7% 6% 5% Past performance is no guarantee of future results. An investment cannot be made directly in an index. Hypothetical value of $500,000 invested at the beginning of Portfolio: 50% large stocks/50% intermediate-term bonds. Assumes reinvestment of income and no transaction costs or taxes. This is for illustrative purposes only and not indicative of any investment. Created by Raymond James using Ibbotson Presentation Materials Morningstar. All Rights Reserved. 3/1/2011

22 RETIREMENT ASSETS DEPLETE FASTER WITH HIGHER WITHDRAWAL RATES AGE TO WHICH A PORTFOLIO MAY LAST BASED ON WITHDRAWAL RATE (90% CONFIDENCE LEVEL) 10% Withdr. Rate Portfolio Stocks Bonds Cash 50% Age An investment cannot be made directly in an index. IMPORTANT: Projections generated by Morningstar regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Results may vary over time and with each simulation. This is for illustrative purposes only and not indicative of any investment. Created by Raymond James using Ibbotson Presentation Materials 2011 Morningstar. All Rights Reserved. 3/1/2011

23 PROBABILITY OF MEETING INCOME NEEDS VARIOUS WITHDRAWAL RATES AND PORTFOLIO ALLOCATIONS OVER A 25-YEAR RETIREMENT 87% 98% 96% 93% 90% 4% Withdrawal Rate 38% 75% 82% 81% 79% 5% 5% 31% 56% 64% 65% 6% 0% 6% 30% 45% 51% 7% 0% 0% 13% 29% 39% 8% 100% Bonds 75% B 25% S 50% B 50% S 25% B 75% S 100% Stocks An investment cannot be made directly in an index. IMPORTANT: Projections generated by Morningstar regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Results may vary over time and with each simulation. This is for illustrative purposes only and not indicative of any investment. Created by Raymond James using Ibbotson Presentation Materials 2011 Morningstar. All Rights Reserved. 3/1/2011

24 PLANNING FOR RETIREMENT RECOGNIZING THE RISKS WHAT IF You face the risk of many unforeseen costs throughout a lengthy retirement. Some unknowns are easier to protect against than others. As the rising costs of long-term care help to illustrate, it s important to consider which unknowns you can protect against and take action early on. Average Daily Rates by Type of Care Trend Data ( ) Source: Prudential,

25 PLANNING FOR RETIREMENT PRIORITIZE RETIREMENT OBJECTIVES Retirement planning requires individuals and families to prioritize among competing objectives and establish where they might be willing to sacrifice to achieve reasonable outcomes. CURRENT LIFESTYLE MOST IMPORTANT (not willing to sacrifice) RETIREMENT LIFESTYLE INVESTMENT RISK BENEFITING OTHERS UNKNOWN RISKS RETIREMENT DATE LESS IMPORTANT (willing to sacrifice as needed) 25

26 PLANNING FOR RETIREMENT UNDERSTAND SPENDING One of the first steps in establishing a retirement plan is to quantify your expense requirements, differentiating between your unique needs and wants. Essential Expenses, e.g., Mortgage Insurance Food Clothing Healthcare Non-Essential Expenses, e.g., Travel Entertainment Club memberships Charitable giving Legacy for heirs Data Gathering Worksheet 26

27 PLANNING FOR RETIREMENT UNDERSTAND SPENDING In order to meet the expenses you quantified, we ll need to account for every source of reliable income in retirement, as well as a current inventory of your assets that are intended to support income in retirement. Consistent income from: Social Security Pension payments Part-time employment Other income Financial assets, including: 401(k)s IRAs Roth IRAs Annuities Brokerage and checking accounts Certificates of deposit 27

28 PLANNING FOR RETIREMENT UNDERSTAND OTHER FACTORS There are other factors we will discuss that could impact your spending decisions and the way we allocate your assets throughout retirement. Includes: Business Real estate Collectibles Includes: Cash reserve Life insurance Long-term care needs Disability Includes: Supporting family members Leaving a legacy Charitable giving 28

29 PLANNING FOR RETIREMENT IDENTIFY NEEDS GAP Once we quantify your sources of income, we can determine whether that income is sufficient to fund at a minimum those expenses you have identified as needs. It s probable that you ll need to withdraw from your assets you ve designated for retirement to meet these needs. 29

30 PLANNING FOR RETIREMENT DESIGN FOR NEEDS If your reliable income isn t enough to at least cover the needs you ve identified, we ll analyze how your assets are allocated, and evaluate how your portfolio could be structured to generate income for your needs. 30

31 PLANNING FOR RETIREMENT DESIGN FOR WANTS Once we ve identified how much of your retirement assets will be required to fill your needs, we ll determine what withdrawal rate is sustainable to support your wants. Creating your unique spending policy will help you to understand how much of your portfolio can be spent on non-essential expenses by setting up a sustainable withdrawal rate over time. 31

32 PLANNING FOR RETIREMENT IMPLEMENT AND MANAGE After we ve thoroughly discussed these factors, we ll implement a plan that reflects what is most important to you and balances the risks you face throughout retirement. Then we ll monitor and adjust the plan as needed. 32

33 PROVIDING FOR RETIREMENT INCOME Retirement risks can be managed by intelligent combination of funds, stocks and bonds, and insurance products How do you find the right asset mix for retirement? - age and risk tolerance - desire for consumption and bequest - expenses and fees of product choices Created by Raymond James using Ibbotson Presentation Materials 2011 Morningstar. All Rights Reserved. 3/1/2011

34 DISCLOSURES Investing in small-cap stocks generally involves greater risks and, therefore, may not be appropriate for every investor. U.S. government bonds and Treasury bills are guaranteed by the U.S. government and, if held to maturity, offer a fixed rate of return and guaranteed principal value. U.S. government bonds are issued and guaranteed as to the timely payment of principal and interest by the federal government. Treasury bills are certificates reflecting short-term (less than one year) obligations of the U.S. government. Diversification does not ensure a profit or guarantee against a loss. Holding stocks for the long-term does not ensure a profitable outcome. Investing involves risk and investors may incur a profit or a loss. Large stocks are represented by the S&P 500, an unmanaged index of 500 widely held stocks. Investors cannot invest directly in an index. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices rise. Municipal bond interest is not subject to federal income tax but may be subject to AMT, state or local taxes. March 1, 2011 Source: Created by Raymond James using Ibbotson Presentation Materials 2011 Morningstar, Inc. All rights reserved. Used with permission Raymond James & Associates, Inc., member New York Stock Exchange/SIPC 2011 Raymond James Financial Services, Inc., member FINRA/SIPC

35 DISCLOSURES Asset allocation and diversification do not ensure a profit or guarantee against a loss. Holding stocks for the long-term does not insure a profitable outcome. Investing in stocks always involves risk, including the possibility of losing one's entire investment. Standard deviation measures the fluctuation of returns around the arithmetic average return of investment. The higher the standard deviation, the greater the variability (and thus risk) of the investment returns. Correlation is a statistical measure of how two securities move in relation to each other. Perfect positive correlation (+1) implies that as one security moves, either up or down, the other security will move with it. Perfect negative correlation (-1) means that if one security moves in either direction, a security that is perfectly negatively correlated will move by an equal amount in the opposite direction. If the correlation is 0, the movements of the securities are said to have no correlation; their performance relative to each other is completely random. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices rise. March 1, 2011 Source: Created by Raymond James using Ibbotson Presentation Materials 2011 Morningstar, Inc. All rights reserved. Used with permission Raymond James & Associates, Inc., member New York Stock Exchange/SIPC 2011 Raymond James Financial Services, Inc., member FINRA/SIPC