Retirement Redefined: Income Planning for the Modern Retiree

Transcription

1 Retirement Redefined: Income Planning for the Modern Retiree Challenges and choices facing pre-retiree baby boomers For investors. Not FDIC Insured May Lose Value No Bank Guarantee

2 Retirement Income Planning Agenda Modern retiree Critical factors Five key risks Retirement income planning 2

3 MODERN RETIREE You Are Not Alone Many issues face members of the largest generation in American history as they contemplate retirement. As a result, most have put off planning. In 2011, the first of 78 million baby boomers turned % 72 % 77% of pre-retirees consider it important or very important that they have a retirement income plan 2 72% of pre-retirees have no retirement income plan Based on births ( ), U.S. Department of Commerce, Bureau of Census. 2. Fidelity Advisor 2015 Survey of Investors at Retirement, September Conducted by Research Now on behalf of Fidelity Investments, this survey included 2,021 investors between the ages of 50 and 75 with investable assets of $100,000 or more. Fidelity Investments was not identified as the survey s sponsor.

4 MODERN RETIREE A New Retirement Scenario Retirement Income Planning Traditional Retiree Has a pension plan and health care coverage Modern Retiree Self-funded personal assets to cover lifetime income and health care 4

5 MODERN RETIREE Retirement Is Changing Traditional Retiree RELATIVELY UNCOMPLICATED Born 1950 Married 1973 Two children Retired 2010 Company pension Empty-nester No mortgage No college payments Modern Retiree MORE COMPLEX "SANDWICH GENERATION" Born 1950 Twice married Three grown children and four grandchildren from first marriage Two teenagers from second marriage Facing college bills SEP-IRA Not sure when he will retire Aging parents Mortgage 5 Hypothetical examples.

6 CRITICAL FACTORS Planning Your Retirement When Where How What Earlier retirement lowers lifetime Social Security benefit, increasing investment income need. Cost of living, health and longterm care, and taxes vary nationwide. Income needs impacted by working part-time, staying active, travel plans, not downsizing. Source of income? Social Security, guaranteed pension, annuities, 401(k)/IRA, real estate financial gain from downsizing? 6

7 CRITICAL FACTORS Starting Social Security Benefits Decision is based on personal factors. Current cash needs Health and family longevity Other retirement income sources Long-term impact of accepting reduced payments 7

8 CRITICAL FACTORS Deciding When Affects Benefits Monthly benefit amounts differ based on the age you decide to start receiving benefits. This hypothetical example assumes a benefit of $1,000 at a full retirement age of 66 MONTHLY BENEFIT AMOUNT $1,400 $1,200 $1,000 $800 $600 $400 $750 $800 $866 $933 $1,000 $1,080 $1,160 $1,240 $1,320 Decision impacts family Spousal benefits could be reduced in monthly income and survival benefits Children under 18 may be eligible for survivor benefits $200 $ AGE YOU CHOOSE TO START RECEIVING BENEFITS 8 Source: When To Start Receiving Retirement Benefits, SSA Publication No (socialsecurity.gov).

9 CRITICAL FACTORS Impact When You Keep Working If you don t take Social Security benefits until full retirement age You receive the maximum amount due you Any continuing employment earnings will not have an adverse effect on your Social Security benefits If you take Social Security benefits while continuing to work You could experience a 50% reduction in your Social Security benefits Social Security is complex. Learn more at socialsecurity.gov/planners 9

10 FIVE KEY RISKS Five Key Risks to Lifetime Income You may live longer than you think. Plan accordingly. Many people will exceed the average life expectancy for their age group. Here are their odds: 50 % 25 % Male, age 65 Living to 85 Living to 92 Female, age 65 Living to 88 Living to 94 Couple, both age 65 One will live to 92 One will live to Source: Annuity 2000 Mortality Table, Society of Actuaries. Figures assume a person is in good health.

11 FIVE KEY RISKS Inflation The effect of inflation on purchasing power. Even at a low inflation rate of 2%, in 25 years $50,000 will buy as much as $30,477 buys today $60,000 $50,000 $50,000 DOLLARS $40,000 $30,000 $20,000 $30,477 at 2% inflation $23,880 at 3% inflation $18,756 at 4% inflation $10,000 $0 Today 5 Years 10 Years 15 Years 20 Years 25 Years YEARS FROM RETIREMENT START DATE 11 All numbers were calculated based on hypothetical rates of inflation of 2%, 3%, and 4% (the historical average from 1926 to 2013 was 3%) to show the effects of inflation over time. Actual inflation rates may be more or less and will vary.

12 FIVE KEY RISKS Asset Allocation Retirees may need stocks for the long haul. COMPARISON OF AVERAGE ANNUAL RISING COSTS VS. AVERAGE ANNUAL INVESTMENT RETURNS Health care costs* 5.8% AVERAGE ANNUAL PORTFOLIO RETURNS ( ) 5.97% 7.95% 8.94% 9.62% Inflation 3.0% RISING COSTS * Data for health care costs is from the Centers for Medicare and Medicaid Services, National Health Expenditures Estimates EXAMPLES OF TARGET ASSET MIXES DESIGNED TO MEET VARIOUS GOALS Conservative Balanced Growth Aggressive growth 14% Domestic stock 6% Foreign stock 50% Bonds 30% Short-term 35% Domestic stock 15% Foreign stock 40% Bonds 10% Short-term 49% Domestic stock 21% Foreign stock 25% Bonds 5% Short-term 60% Domestic stock 25% Foreign stock 15% Bonds 12 This graph is for illustrative purposes only and does not represent actual or implied performance of any investment option. All indices are unmanaged and it is not possible to invest directly in an index. The graph represents the average annual return percentage for the investment categories shown from 1926 to 2014 from Ibbotson Associates. Past performance is no guarantee of future results. Returns include the reinvestment of dividends and other earnings. Domestic stocks are represented by the Standard & Poor s 500 Index (S&P 500 ). Foreign stocks (international equities) are represented by the MSCI EAFE Index for the period from 1970 to the last calendar year. Foreign stocks prior to 1970 are represented by the S&P 500. Bonds are represented by the U.S. Intermediate Government Bond Index. Short-term investments are represented by U.S. Treasury bills. Inflation is represented by the Consumer Price Index. U.S. stock prices are more volatile than those of other securities. Government bonds and corporate bonds have more moderate short-term price fluctuation than stocks but provide lower potential long-term returns. U.S. Treasury bills maintain a stable value (if held to maturity), but returns are generally only slightly above the inflation rate. See Methodology and information on slide 25 for further details. Asset allocation does not ensure a profit or protect against a loss.

13 YEARS PORTFOLIO MAY LAST IN AN EXTENDED POOR MARKET FIVE KEY RISKS Rate of Withdrawal Higher withdrawal rates can derail your plan no matter what your asset mix yrs 32 yrs BALANCED PORTFOLIO 50% Stocks 40% Bonds 10% Short-term GROWTH PORTFOLIO 70% Stocks 25% Bonds 5% Short-term yrs 17 yrs yrs 12 yrs 10 yrs 9 yrs 0 4% 6% 8% 10% INFLATION-ADJUSTED WITHDRAWAL RATE 13 Source: Fidelity Investments. Hypothetical value of assets held in an untaxed balanced portfolio and growth portfolio and inflation-adjusted withdrawal rates as specified. Stocks, bonds, and short-term investments are represented by the S&P 500, U.S. Intermediate Term Government Bonds, and 30-day U.S. Treasury Bills, respectively. Returns for stocks, bonds, short-term investments, and inflation are based on the risk premium approach. Actual rates of return may be more or less. The chart is for illustrative purposes only and is not indicative of any investment. Past performance is no guarantee of future results. See Methodology and information on slides 25 and 26 for further details.

14 FIVE KEY RISKS Health Care Costs $245,000 Lifetime out-of-pocket health care expense estimate for a 65-year-old couple 1 5.8% Annual increase in health care spending through Fidelity Benefits Consulting, The estimate assumes no employer-provided retiree health care coverage and applies to retirees with traditional Medicare insurance coverage with life expectancies in retirement of 17 years for men and 20 years for women. 2. Centers for Medicare and Medicaid Services, National Health Expenditures Projections

15 FIVE KEY RISKS Better Health Care Isn t Cheap Medical Services Diagnostic Testing Prescription Drugs Cost of knee replacements rose 70% over last decade 1 Cost of MRI/CT/PET scans tripled over last decade 1 Number of prescriptions continues to grow, up 55% from 1998 to U.S. Dept. of Health and Human Services, Data for decade ending 12/31/ Sources: NDCHealth and Kaiser Family Foundation.

16 FIVE KEY RISKS Understanding Health Care Costs 44 % Medicare cost-sharing provisions 23 % Out-of-pocket prescription drug expenses 33 % Out-of-pocket for Medicare, Part B & D premiums $245,000 Out-of-pocket health care expense estimate for a 65-year-old couple 2 People may underestimate these costs by more than 50% Fidelity Benefits Consulting, Based on a hypothetical couple retiring in 2015, 65 years or older, with average (82 male, 85 female) life expectancies. Estimates are calculated for "average" retirees, but may be more or less depending on actual health status, area of residence, and longevity. Assumes individuals do not have employer-provided retiree health care coverage, but do qualify for Medicare. The calculation takes into account cost-sharing provisions (such as deductibles and coinsurance) associated with Medicare Part A and Part B (inpatient and outpatient medical insurance). It also considers Medicare Part D (prescription drug coverage) premiums and out-of-pocket costs, as well as certain services excluded by Medicare. 2. Fidelity-sponsored HSA Survey, conducted by GfK Public Affairs & Corporate Communications, February The HSA survey was conducted by GfK Public Affairs & Corporate Communications from February 4 to 20, The study was conducted among a nationally representative sample of 1,836 U.S. adults ages with a household income of $25,000 or more. Respondents also have primary or shared responsibility for household financial decisions and receive health care benefits through their own or their spouse's employer. Nearly half (48%) of the pre-retirees aged surveyed estimated they would need only $50,000 for health care expenses in retirement.

17 RETIREMENT INCOME PLANNING Expectations Retirement realities may not match expectations. Be realistic when tailoring your plan. AGES EXPECTATIONS FOR RETIREMENT AGES 65+ ACTUAL EXPERIENCE IN RETIREMENT % 65% 86% 70% 80% 52% 77% 52% 68% 58% 40 39% 20 14% 0 More time for interests More time with family Volunteer work More travel Not working Second career 17 Source: Growing Old in America: Expectations vs. Reality, Pew Research Center, June 29, 2009.

18 RETIREMENT INCOME PLANNING Pre-retirees Need Help The Fidelity Advisor 2015 Retirement Income survey found that: Almost 72 % of pre-retirees have no retirement income plan 3 4 out of pre-retirees believe it s important to have a plan 1 5 of pre-retirees don t know how long to plan for 18 Source: Fidelity Advisor 2015 Survey of Investors at Retirement, September Conducted by Research Now on behalf of Fidelity Investments, this survey included 2,021 investors between the ages of 50 and 75 with investable assets of $100,000 or more. Fidelity Investments was not identified as the survey's sponsor

19 RETIREMENT INCOME PLANNING Getting Started A Simplified Retirement Income Plan: Starts by focusing on the first three years of retirement Can be created quickly Emphasizes budget and expense projections in the near term rather than 20 or 30 years out 19

20 RETIREMENT INCOME PLANNING Budgeting The Fidelity budgeting discussion worksheet: Uncovers ongoing cash outflows on big-ticket items and guaranteed income upon entering retirement Allows projections of future expenses based on gathered information Presents a near-term view of retirement finances 20

21 RETIREMENT INCOME PLANNING Budgeting Information Review with your advisor: Cash outflows today And inflows Housing Mortgages, equity lines, utilities and taxes, planned upgrades or renovations Health care Medicare or employer-funded plan, life and long-term care insurance Family and education Dependent children, existing and anticipated school and college expenses Lifestyle and other Do you plan to travel extensively or buy a big-ticket item such as a boat or RV? Assets Social Security, defined benefit plans, 401(k), savings, annuities, and real estate 21

22 RETIREMENT INCOME PLANNING Taking Action Generate a retirement income plan composed of three separate pools of money: Liquidity Capital Preservation Long-term Growth Focuses on near-term needs Provides for short-term cash flow Invests for lower risk Provides for expenses and unknowns 4 to 7 years out Invests for growth without excessive risk Provides for financial needs 8+ years out Affords time to weather market volatility Invests in U.S. and international equities and fixed-income 22

23 RETIREMENT INCOME PLANNING Develop a Written Plan With Your Advisor Your Advisor Can Help You: Check your health care expense estimates Bucket essential and discretionary expenses Review your sources of income Create a plan to ensure that your health care and other essential expenses are covered Develop a financial strategy for discretionary spending 23

24 Sources to Help Make Informed Decisions Online resources: Medicare.gov Eldercare.gov AARP.org State Health Insurance Programs (SHIPtalk.org) Benefitscheckup.org SocialSecurity.gov Teresa A. Jacobsen, CRPC, CPM Managing Director Wealth Management UBS Financial Services Inc. 750 Washington Blvd. Stamford, CT Office: Toll free:

25 Methodology and Information (Slides 12 & 13) 25 IMPORTANT: Any projections and simulations are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Over time, results may vary with each use. It is not possible to invest directly in an index. All indices include reinvestment of dividends and interest income. Although past performance does not guarantee future results, it may be useful in comparing alternate investment strategies over the long term. Performance returns for actual investments will generally be reduced by fees or expenses not reflected in these hypothetical illustrations. On slide 12: Generally, among asset classes, stocks may present more short-term risk and volatility than bonds or short-term instruments but may provide greater potential return over the long term. Although bonds generally present less short-term risk and volatility than stocks, bonds contain interest rate risk (as interest rates rise, bond prices usually fall); the risk of issuer default; and inflation risk. U.S. Treasury bills maintain a stable value (if held to maturity), but returns are generally only slightly above the inflation rate. Foreign investments, especially those in emerging markets, involve greater risk but may offer greater potential return than U.S. investments. The target asset mixes are hypothetical models and illustrate certain examples of many possible combinations of investment allocations that could help an investor pursue his or her goals; these target asset mixes do not constitute investment advice under the Employee Retirement Income Security Act of 1974 (ERISA). You should choose your own investments based on your particular objectives and situation. On slide 13: Information is not intended to project or predict the present or future value of the actual holdings in a participant s portfolio or the performance of a given model portfolio of securities. The calculations and results generated for this chart are based on historical monthly performance from January 1972 through December 2014 from Ibbotson Associates. Stocks, bonds, and short-term investments are represented by the S&P 500, U.S. Intermediate-Term Government Bonds, and U.S. 30-day T-bills, respectively. The estimated returns for the stock and bond asset classes are based on a risk premium approach. The risk premium for these asset classes is defined as their historical returns relative to a 10-year Treasury bond. Risk premium estimates for stocks and bonds are each added to the 10-year Treasury yield. Short-term investment asset class returns are based on a historical risk premium added to an inflation rate, which is calculated by subtracting the TIPS (Treasury Inflation-Protected Securities) yield from the 10-year Treasury yield. This method results in what we believe to be an appropriate estimate of the market inflation rate for the next 10 years. Each year (or as necessary), these assumptions are updated to reflect any movement in the actual inflation rate. Volatility of the stocks (domestic and foreign), bonds, and short-term asset classes is based on the historical annual data from 1926 through the most recent year-end data available from Ibbotson Associates, Inc. Stocks, bonds, and short-term are represented by the S&P 500, U.S. Intermediate Term Government Bonds, and 30-day U.S. Treasury bills, respectively. Annual returns assume the reinvestment of interest income and dividends, no transaction costs, no management or servicing fees, and the rebalancing of the portfolio every year. The information highlights varying levels of stocks, bonds, and short-term investments. The purpose of these hypothetical illustrations is to show how portfolios may be created with different risk and return characteristics to help meet a participant s goals. You should choose your own investments based on your particular objectives and situation. Remember, you may change how your account is invested. Be sure to review your decisions periodically to make sure they are still consistent with your goals. You should also consider all of your investments when making your investment choices. Index Definitions The S&P 500 Index is a registered service mark of the McGraw-Hill Companies, Inc., and has been licensed for use by Fidelity Distributors Corporation and its affiliates. It is an unmanaged index of the common stock prices of 500 widely held U.S. stocks and includes reinvestment of dividends. It is not possible to invest directly in the index. U.S. Intermediate Government Bond Index is an unmanaged index that includes the reinvestment of interest income. MSCI EAFE (Europe, Australasia, Far East) Index is an unmanaged market capitalization-weighted index that is designed to represent the performance of developed stock markets outside the United States and Canada and assumes the highest possible withholding taxes are applicable. The Consumer Price Index is a widely recognized measure of inflation calculated by the U.S. government that tracks changes in the prices paid by consumers for finished goods and services. U.S. Treasury bills are backed by the full faith and credit of the U.S. government.

26 Not NCUA or NCUSIF insured. May lose value. No credit union guarantee. For investors. The information contained herein is general in nature. It is not intended to be, and should not be construed as, legal or tax advice. Fidelity does not provide legal or tax advice. Laws of a specific state or laws relevant to a particular situation may affect the applicability, accuracy, or completeness of this information. Consult an attorney or tax advisor regarding your specific legal or tax situation. Not NCUA or NCUSIF insured. May lose value. No credit union guarantee. Diversification does not ensure a profit or guarantee against a loss. Investing involves risk, including risk of loss. Approved for use in Advisor and 401(k) markets. Firm review may apply. Third-party trademarks and service marks are the property of their respective owners. All other trademarks and service marks are the property of FMR LLC or an affiliated company. Before investing, consider the funds investment objectives, risks, charges, and expenses. Contact your investment professional or visit advisor.fidelity.com for a prospectus or, if available, a summary prospectus containing this information. Read it carefully FIDELITY INVESTMENTS INSTITUTIONAL SERVICES COMPANY, INC., 500 SALEM STREET, SMITHFIELD, RI