7 Critical Risks In Retirement

Transcription

1 7 Critical Risks In Retirement Don t Leave It To Chance Nathaniel M. Pulsifer And Bryan Anderson AnnuityStraightTalk.Com

2 7 Critical Risks In Retirement Don t Leave It To Chance.

3 7 Critical Risks In Retirement Retirement Offers Different Risks And Portfolio Challenges Traditional Advice- Buy and Hold, 4% Withdrawal Rate and Probability Of Failure Modeling Offers No Guarantee Of Success Many Consumers Demand Certainty, And Wall Street Offers None Annuities Offer Security, Safety, And Certainty To Consumers Annuities Effectively Offset Key Risks In Retirement Selecting The Right Annuity For A Consumer s Specific Needs Is Best Accomplished With The Help Of Knowledgeable Specialist.

4 Early & Middle Years Just Getting Started Saving Time To Recover Growth Optimal Time To Save! Saving A While Control Debt Family Cost Pressure High Cost Years 4 Stages Of Investing Near & In Retirement Nearing Retirement Transition to Safety Losses = High Risk Time to Play Catch-Up Retired Return ON Investment is Less Important Than Return OF Investment Make It Last Lifetime Many New Risks

5 Assets Accumulation vs. Distribution Phase Risk is greatest in transition between accumulation and distribution phases Time

6 Risks, Before And After Retirement Risks In Accumulation Years Saving Rate Risk Accumulation Risk Growth Risk Risks in Pre and Post Retirement Years Longevity Risk Market Investment Risk Sequence Of Returns Risk Inflation Risk Tax Risk Demographic Risk Systematic Withdrawal Risk Political Risk

7 Summary Of Risks Longevity Risk: Increases With Age Demographics Risk: Makes All Other Risks Worse Sequence Risk: Timing Of Returns Is More Important Than Rate Inflation Risk: Inflation Erodes Purchasing Power Withdrawal Rate Risk: 4% Withdrawal Rate No Longer Safe Market Risk: Bear Market, Low Rates, Volatility Is Here To Stay Political Risk: Debt And Turmoil and Dysfunctional Government

8 Risks In Retirement Ignorance Is Not A Safe Strategy!!

9 What s Wrong With Living Too Long? LONGEVITY RISKS

10 Average Life Expectancy Is Misleading Average Life Expectancy is 65 Year Old Male = 85 Years 65 Year Old Female = 88 Years Couples live longer Still! Average life expectancy for one of a Couple = 92 Years! Problem Is Average Is Just The Midpoint 50% Live LONGER Than Average A Significant % May Live Well Into Their 90 s! What If You Break 100? Will Your Assets Survive? Source: Annuity 2000 Mortality Tables, Society of Actuaries

11 Increasing Longevity Requires Longer Plan Horizon Probability 100% 75% 50% Male Female Couple 25% 27 years % Age Source: Annuity 2000 Mortality Tables, Society of Actuaries Probability of a 65-year-old living to various ages

12 Longevity: Check Yourself Key Tools: Quick Estimate: More Comprehensive: Health, Medical, And Lifestyle Is Pushing Life Expectancy Many People Will Live Longer Than They Expect Society Of Actuaries Proves, Annuity Owners Live Longer! High Income Annuitants Have 30% Less Morality Age 65 High Income Annuitants May Live 3+ Years Above Average

13 Solutions: Outlive Your Expectations, Not Your Money!! Personal Situation Know Your Health Know Your Family History Chart An Informed Course Do Not Accept Scenarios That Only Plan To Age 90 Longevity Is An Insurable Risk Lifetime Income Annuities = Longevity Protection Buy If At All Possible If You Don t Insure, Be Darn Sure You re Making An Informed Decision!

14 Bonus Stats on Longevity Risks Benjamin Gompertz first defined the mathematical facts of mortality in In any given set of people, after the volatile early years, the increase in the mortality rate grows +/-9% per year. Since the 1950 s, our life expectancy has grown, and a new trend emerges- a DECLINE in later year mortality. Finally, annuitants as a group live longer than non-annuitized retirees. Lessons: 1) The Longer you live, the more likely you are to live longer. 2) Married couples live longer than singles. 3) Annuitants as a population tend to live 3-5 years longer than non-annuitized retirees!

15 What About The Kids? They ll Support Me DEMOGRAPHIC RISKS

16 Demographic Risk Visualized Source: US Census

17 Where We Are Today Speed it up fast enough and that Baby Boom is like a wave that's going to crest over the levees of our Social Security apparatus. Source: Reddit

18 Demographic Stress On The Market Demographics Show Peak Spending Age 48

19 What If This Happens. What happens when this massive sales pressure takes place not for a month, but a year? Then five years, and ten years. With no end in sight for decades? With up to 50 million Boomers attempting to cash out trillions of dollars of investments each year?" What happens to prices as the cash coming in slows down, and the profits are taken out instead of being reinvested? When instead of cash, cash and more cash pouring into the markets it is cash, cash and more cash being pulled out of the markets?" Dan Ammerman, Contracts With Our Children

20 Demographic Risks Summary Demographics May Make All Other Risks Worse Government Benefits Likely To Be Lowered Social Security Benefits Likely To Be Taxed Fewer Workers + More Dependants = Economic Stress Many Sellers, Stressed Buyers= Lower Equity Prices Higher Taxes To Pay Debts = Lower Growth

21 Demographic Risks: Solutions Protect Your Assets By Purchasing Income Annuities An Annuity-Backed Personal Pension Mitigates Risks Mitigate Risk Of Lower Government/ Social Security Benefits Mitigate Risk Of Weak Market Performance/ Overselling Mitigate Risk Of Taxes By Utilizing Tax-Deferred Annuities To Hold Your Money Protect Your Money Grow Your Money & Take Income From Your Money

22 What About The Market? That ll Support Me MARKET RISKS

23 Assets Accumulation vs. Distribution Phase Risk is greatest in transition between accumulation and distribution phases Time

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25 Media... In The Dark

26 Depression Cycle? Market Swings Wildly Harry Dent Forecasts 20+ Year Recession And Dow 3300 by 2015 Baby Boomer Consumption Is Falling, Dragging Stocks Down

27 Market Risks Summary Past performance is no guarantee of future results The markets are choppier and more volatile than ever Many investment managers are steeped in bull market offense, and may not have any bear market defense strategies. If you re approaching retirement, you do not have time to recover if you sustain losses

28 Market Risks: Solutions Reduce Market Exposure By Guaranteeing Income To Cover Essential Spending Once Income Is Guaranteed, A Portfolio Has More Overall Safety Overall Risk Is Mitigated When Income Is Secure

29 Well, I ll Just withdraw A Little Each Year SEQUENCE OF RETURN RISKS

30 When Do Bad Years Fall? Return Sequence Average Rate of Return Ruin Age Steady Returns 7% 7% 7% 7% /- Months Moderate Loss 7% -13% 27% 7% Moderate Gains 7% 27% -13% 7% Early Loss -13% 7% 27% 7% Strong Gains 27% 7% -13% 7% *Assumes $9,000 Spending Per Year, Infl. Adjusted

31 How Long Will Your Portfolio Last? $140,000 $120,000 $100,000 $80,000 $60,000 $40,000 $20,000 Strong Gain Moderate Gain Moderate Loss Early Loss $- Source: Retirement Ruin and the Sequencing of Returns - Moshe A. Milevsky,

32 Sequence Of Returns Risk Summary Average Returns Mean Nothing Timing Is Everything Risk Is Running Out Of Money Why Carry That Risk? Sequence Of Returns Risk Can Be Insured Around

33 Sequence Of Returns Risk: Solutions Convert Sufficient Assets Into An Annuity That Provides An Income Stream To Cover Guaranteed Expenses Eliminate Sequence Of Returns Risk By Eliminating The Need To Sell When Markets Are Down

34 Bonus Stats on Sequence Risks Moshe Milevsky is a modern day economist and prolific writer well versed in Annuities, efficient portfolios, and is a terrific writer. Highly Recommended Works: 1) Are You A Stock Or A Bond? 2) 7 Most Important Equations For Your Retirement 3) Pensionize Your Nest Egg 4) Your Money Milestones Greatest Idea: Your Human Capital (Earnings Ability) Is A Key Component Part Of Your Risk Allocation Calculation

35 Well, I ll Just Withdraw A Little Less Each Year WITHDRAWAL RATE RISKS

36 Withdrawal Rate Risk Concepts Sequence Of Returns When Do Good And Bad Years Fall? Rate Of Portfolio Withdrawal 4%? 7%? What Is A Safe Portfolio Withdrawal Rate? Probability Of Ruin Reverse Dollar Cost Averaging What Is The Market Doing When You Must Sell?

37 $ 250,000 $ 200,000 $ 150,000 $ 100,000 $ 50,000 $ 0 The Effect Of Withdrawals 50% Stock/ 50% T Bond portfolio, withdraw $5,000 a year (adjusted for inflation) Returns with withdrawal Returns without withdrawal ~9.64% Compound Annual Growth Rate Over 20 years, After Inflation Same Growth Rate, 5% Withdrawal, Produces Portfolio Failure Hypothetical example of $100,000 portfolio. 50% S+P 500, & 50% T Bonds. Assumes Re-investments of Income and No transaction cost/taxes. This is for Illustrative purpose only, is not indicative of any Investment. Past performance doesn t guarantee of future results. Stocks- S&P 500 is consider to be representative of stock market in general. Bonds 5-Year US Govt. Bonds. Inflation Consumer Price Index

38 Withdrawal Rate: How Long Does A Portfolio Last? Can A Fluctuating Portfolio Sustain Withdrawals? Stocks Fluctuate Withdrawals Do Not Being Invested = Gains Maybe But Selling While Down = Drain

39 What Is A Monte Carlo Simulation?

40 FireCalc.com

41 What s A Safe Withdrawal Rate? If a new retiree pulled 7% from a $2 million nest egg each year starting in 2000, he or she would have been left with only $394,634 by the end of last year and might need to stretch that two decades or longer. Source: WSJ

42 What s A Safe Rate? Another prediction is even bleaker. For a 60% stock, 40% bond portfolio meant to last 30 years, the maximum starting withdrawal rate for 2010 retirees should have been just 1.8%, meaning $2 million in savings would yield just $36,000 a year. Current Research From Professor Wade Pfau Produces This Depressingly Low Target "I don't think for most people 1.8% is at all realistic, but it's because in the past 15 years the variables are so different from anything they've been in the past," he says. Source: WSJ

43 Reverse Dollar Cost Averaging Dollar Cost Average- Systematic Purchases Over Time Buy Regardless Of Price Per Share Price Ends Up Lower Than Average Per Share Price Reverse Dollar Cost Average- Systematic Sales Of Shares For Income Sell Regardless Of Market Per Share Proceeds End Up Lower Than Average Proceeds Per Share Timing Is Everything- If You Have To Sell And The Market Is Down, You Have To Sell More Shares To Generate Equal Dollars- You Lose! Source: Henry Hebler, Reverse Dollar Cost Averaging, 1/2/01

44 Reverse Dollar Cost Averaging Cont. If You Have To Sell And The Market Is Down, You Have To Sell More Shares To Generate Equal Dollars- You Lose! You Erode Portfolio EARNING Power To Generate Required Income Why Put Yourself In A Position Of Being FORCED To Take Losses Just To Buy Groceries?? You CAN and SHOULD Insure Your INCOME To Avoid This Risk.

45 Withdrawal Rate Risk Summary Significant Assets Lower The Risk What s A Safe Rate? Think 2% Withdrawal Rate Forced Selling = Reverse Dollar Cost Averaging High Withdrawal Rate + Bad Sequence Of Returns = MAGNIFIED Risk

46 Withdrawal Rate Risk: Solutions Use Annuities To Shift Risks To Insurance Companies Shift Withdrawal Rate Shift Sequence Of Returns Risk Shift Reverse Dollar Cost Averaging Risk Annuities Are Insurance For Your Money That Cover These EXACT Risks

47 Bonus Stats on Withdrawal Rate Risk Systematic Withdrawal Programs: Unsafe At Any Speed by Garth Bernard. Withdrawls-Unsafe-at-Any-Speed.pdf 4% Rule Under Fire: Wade Pfau Research Sequencing Returns- Moshe Milevsky eturns%20moshe%20milevsky.pdf

48 Oh- And Another Thing INFLATION RISKS

49 Inflation Risk What Will $1,000 Buy In The Future? Years 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 1 $990 $980 $971 $962 $952 $943 $935 $926 $917 $909 5 $951 $906 $863 $822 $784 $747 $713 $681 $650 $ $905 $820 $744 $676 $614 $558 $508 $463 $422 $ $861 $743 $642 $555 $481 $417 $362 $315 $275 $ $820 $673 $554 $456 $377 $312 $258 $215 $178 $ $780 $610 $478 $375 $295 $233 $184 $146 $116 $92 30 $742 $552 $412 $308 $231 $174 $131 $99 $75 $57 35 $706 $500 $355 $253 $181 $130 $94 $68 $49 $36

50 Calculate Inflation For Yourself What Is Dollar Worth Tomorrow? What Was It Worth In The Past?

51 Other Inflation Measures The U.S. government published an average inflation rate of 3.07% between 1983 and Over the same period, ShadowStats.com s John Williams' research concluded the real figures produce an average inflation rate of roughly 7.03% Pick Your Favorite

52 Inflation Or Deflation? Inflation: Prices Rise Faster Than Income Deflation: Prices Fall, But You Have No Income

53 Inflation Is Prevalent Deflation Is Prevalent Volatility Is Prevalent Be Aware Of The Risk Inflation Risk Summary

54 Inflation Risk: Solution No One Knows What The Future Inflation Rate Will Be No One Knows If The Future Holds Inflation Or If It Holds More Deflation Spend The Lowest Amount Possible To Get The Necessary Guaranteed Income Then Invest The Rest For Growth

55 Bonus: Discounted Cash Flow Fibonacci is most famous for the Golden Rule numerical sequence found in nature. But Fibonacci also first described discounted cash flow in the year Today, discounted cash flow is central to retirement planning. Discounted Cash Flow determines how long our retirement lasts, and is the driver of calculating Inflation and what a dollar is worth tomorrow Low Interest Rates mean higher savings are needed now to last increasingly long lifetimes... Looming inflation means even more current day dollars will be needed to secure the future

56 And What About The Government? POLITICAL & ECONOMIC RISKS

57 $ 3,000 $ 2,500 $ 2,000 $ 1,500 $ 1,000 $ 500 $ 0 U.S Monetary Base (US$ billions) Source: Federal Reserve Economic Data

58 Velocity of Money GDP to adjusted Monetary Base Source: Federal Reserve Economic Data, Velocity of M2 Money Stock (M2V), Ratio, Quarterly, Seasonally Adjusted

59 The Real National Debt Grows Too Fast To Believe- This Massive Government Spending Is A Definite Threat To YOUR Financial Future.

60 Unemployment Remains High 20.00% Underemployment Unemployment 15.00% 10.00% 5.00% 14.5% 8.2% 0.00% Source: U.S. Department of Labor: Bureau of Labor Statistics, Unemployment Level - Bachelor's degree and higher, 25 years and over, Monthly, seasonally adjusted, in Thousands. Q1

61 Housing Prices Barely Stabilized 250 National Composite Home Price Index Source: Federal Reserve Economic Data, National Composite Home Price Index for the United States (USCSCOMHPISA), Index 2000 Q1 = 100, Quarterly, Seasonally Adjusted

62 Summary Of Political Risks Unemployment and Underemployment Is High Federal Debts Are Massive And Out Of Control Money Printed With Abandon Monetary Base Exploding Us Government On Edge Of Fiscal Cliff.

63 Political Risk: Solution You Can t Control External Threats But You Can Take Personal Responsibility Don t Depend Solely On Social Security Buy Your Own Private Pension Annuity

64 Enough Already How About Some Good News. SOLUTIONS

65 Combat The Risks In Retirement With An Optimal Plan We Craft Retirement Income Plans That Work, Guaranteed Plans That Work Even When Wall Street Falls Apart

66 An Optimal Retirement Income Plan. Covers Baseline Expenses With Guaranteed Income Guaranteed Income Gives Financial Security From That Base Of Guaranteed Income, A Good Plan 1) Allows Flexibility For Unknowns Addresses Liquidity and Growth Needs 2) Offers Longevity Protection Lifetime Income, Or Safe Appreciation For The Future 3) Provides A Profit Solid Return On Investment 4) Shields You From Other Risks Optimize Additional Assets Against Inflation, Markets, Government, Taxes, Etc

67 Start With Your Goal Statement What s Your Goal?

68 Red Money Your Money Green Money At Risk Investments Stocks/ Bonds Variable Annuities Mutual Funds REITS Real Estate How Are You Allocated? Safe Investments Checking/ Savings Fixed Annuities Treasuries and CD s I Hope So Money Can t Count On It Volatile Brokers Live In a Red Money World I Know So Money Can Count On It Guaranteed Income Insurance

69 Red Income Your Income Green Income Where s Your Income Coming From? Is Your Income Safe? Where s Your Income Coming From? Typical Sources Stock Sales Bold Yields Dividends Rental Income Variable Annuities Typical Sources CD s Treasuries Pensions Social Security Cash Life Insurance Annuities

70 Summary Red Money/ Green Money Know Where Your Money Is Allocated Are Your Assets In Line With Your Risk Tolerance? Red Money Markets Green Money Guaranteed Safety, Flexibility, Profitability, Longevity Understand Your Preferences Safety Balance Flexibility Income Goal Profitability Offset Expenses To Determine Baseline Needs Find Income Gap Between Current Guaranteed Income + Expenses Longevity Allocating Resources Shift From Red Money Assets To Green Money Income That Meets Goals. Fill Your Base Income Gap Optimize Remainder Of Red Assets To Address Other Risks This Is An Optimal Plan!

71 Get Started Now Nathaniel M. Pulsifer Bryan J. Anderson