International Agricultural Research Centers International Retirement Plan Investment Planning in Retirement
Contents Keeping my assets safe... 1 LifeCycle Strategy... 1 Taking Regular Withdrawals... 2 How much income do I need?... 2 Do I have enough capital?... 2 Comparing income options... 2 Income Strategies in retirement... 5 Drawing Income from capital... 5 Income mix... 6 Next Steps... 7 Important Information... 7 Appendix A - Retirement Annuities... 8
The Plan provides a variety of options for your capital when you retire whether you make withdrawals or not. Keeping my assets safe It's important to keep your assets safe during your retirement years. It is important to use lower risk investments or those that produce a more secure rate of return. However, a longer life expectancy may require more aggressive investing even during your retirement years to preserve the purchasing power of your capital. Risks are not confined to your assets not being secure but also the risk that the growth on those assets does not keep pace with inflation or more realistically the cost of living in the country you decide to retire in. LifeCycle Strategy The LifeCycle strategy can be considered for members wishing to take advantage of the potential for investment growth for all or part of their retirement fund. In the years leading up to retirement (currently set at age 65) the proportion of your assets invested in equities (higher risk) is gradually reduced and the funds allocated in an increasing proportion to fixed interest investments (bond funds, lower risk). Unlike many lifestyle funds which aim to convert a portfolio to cash at retirement in order to purchase an annuity, the LifeCycle strategy is designed to be held by members once in retirement, providing both growth and income. For members in retirement, the LifeCycle strategy currently targets annual returns of between 3% - 4% by investing mostly in bond funds where the emphasis is to seek to maximize total returns consistent with preservation of capital and prudent investment management, whilst also maintaining a small equity exposure to benefit from market gains. The highlighted wheel with 0 years to retirement is an example of the asset mix that might be applied for retirees. It is a low risk model and appropriate for income withdrawals. Investment Planning in Retirement Page 1 of 8
Should you wish to have a higher level of equity content then, you would need to amend your years to retirement on the Allianz platform, although income can still be withdrawn. The strategy is actively managed and, when compared to returns provided by Money Market cash funds or fixed-income annuities, can provide the ability for flexible, regular income withdrawals as well as maintaining a low risk investment portfolio that has the potential to grow. Taking Regular Withdrawals Managing your income is always important, but it becomes even more critical during retirement, when your income comes from your savings rather than from wages and earnings. Because your source of income is limited during retirement, you need to ensure that it lasts through your retirement years. This means determining your income needs in the years leading up to your retirement and, once you retire, efficiently managing your retirement assets. How much income do I need? Your income stream during your retirement years usually depends on your annual expenses, the amount you have saved and your life expectancy. The amount of income you will need from your retirement-savings vehicles generally depends on the amount you have available or will receive from other sources, such as your regular savings and social security. When determining your annual expenses and income streams, bear in mind that you may need to pay income taxes on amounts you withdraw from your retirement account. Do I have enough capital? The planning tools available on the AllianzGI platform will calculate how much your income might be in retirement and how long it will last, based on your current and projected retirement account value. The tools can also indicate how much you might need at retirement to provide for specific income retirements and whether you are currently saving enough to meet those objectives. Comparing income options There are three principal ways of taking income in retirement: Annuities - a guaranteed income Drawing down income from capital Income mix Investment Planning in Retirement Page 2 of 8
We have illustrated the effects of purchasing an annuity or drawing income directly from capital. We have also compared drawing income from a cash fund to drawing income from the LifeCycle strategy. If $500,000 was used to purchase a fixed-income annuity, a 65-year-old male requiring a single life annuity with a 3% annual increase in income might currently receive a starting income of approx. $19,000 per year ($1,583 pm). This would be guaranteed for life but the payments would cease on death and there would be no access to capital for his/her beneficiaries or flexibility in income (Source: FSA Annuity Rate Tables). Annuities can be purchased with dependent options but we have used this single life version for comparison purposes. Dependent option would increase the price of the annuity purchase or decrease the income provided. The differences between fixed income annuities and variable annuities can be found in Appendix A. When drawing a matching income amount from capital we have shown the difference in drawing income from low return, secure investments such as cash funds with average annual returns of 1% and drawing income from the retirement mix of the LifeCycle strategy with average annual returns of 4%. The table below shows the effect the different strategies might have based on the above scenario: Age Annual Income Remaining Capital Annuity Cash Funds LifeCycle Strategy 65 $19,000 0 $500,000 $500,000 66 $19,570 0 $485,810 $500,240 67 $20,157 0 $470,902 $499,897 68 $20,762 0 $455,253 $498,929 69 $21,385 0 $438,836 $497,294 70 $22,026 0 $421,626 $494,946 75 $25,534 0 $322,708 $470,738 80 $29,601 0 $199,564 $420,351 85 $34,316 0 $13,723* $334,778 90 $39,782 0 0 $202,531 95 $46,118 0 0 $9,016** *Capital exhausted by age 86 years and 5 months ** Capital exhausted by age 95 years and 3 months Please be aware the growth rates used for the Cash Funds and LifeCycle Strategy columns are for illustration purposes only and are not guaranteed. In the LifeCycle strategy, the return Investment Planning in Retirement Page 3 of 8
could be lower or higher than 4%. Since the underlying portfolio contains some exposure to equities the asset value could go down as well as up, and this would have a negative effect on the level of withdrawals and how long the capital would last. Under the Cash Funds strategy, the capital is exhausted by age 86 and under the LifeCycle scenario the capital is exhausted by age 95. These strategies may not be suitable for members with a history of longevity in their family. The advantages of these strategies however are that income is flexible and can be increased or decreased at any time, as required. Capital can be accessed at any time and you will also be able to pass on the full remaining value of your assets to your beneficiaries in the event of you pre-deceasing capital exhaustion. The following table highlights the advantages and disadvantages of taking income from an investment portfolio, cash or guaranteed income from annuities Strategy How it works Potential investments Advantages Disadvantages Withdrawals from LifeCycle Strategy Regular withdrawals from a portfolio of investments; managed for ongoing growth of remaining assets Diversified portfolio of equities, bonds, fixed term investments and cash, actively managed to provide income and growth Potential to provide income and growth Withdrawals can be regular or ad hoc Access to capital Investments subject to market risk Risk of fall in future annuity rates if you decide to change strategies later in life Possibility of outliving assets Withdrawals from cash funds Regular withdrawals from a cash fund Cash funds Withdrawals can be regular or ad hoc Access to capital No market risk Capital base secure for beneficiaries Investment subject to inflation risk Risk of fall in future annuity rates if you decide to change strategies later in life Possibility of outliving assets Income from annuities Annuities enable essential expenses to be covered Nil Guaranteed fixed income for life No access to annuity assets No capital available for beneficiaries Investment Planning in Retirement Page 4 of 8
Income Strategies in retirement An efficient retirement strategy is one that uses the least amount of savings to generate the income you need. It should also reflect your preferences for growth potential, guarantees, flexibility, and potential preservation. An example of this could be using annuities for your fixed income requirements and the investment portfolio for more incidental expenses and capital preservation. This could ensure that your essential expenses (food, utilities, health care, and other must-haves) are covered. Then you can position your investment portfolio for growth as well as use it for your discretionary spending (vacations, hobbies, and other nice-to-haves). Drawing Income from capital Drawing from an investment portfolio This method can provide growth potential and flexibility although also the risk of capital volatility and no guaranteed returns. An investment portfolio with a mix of stocks, bonds, and short-term investments can be an essential part of an income mix. It provides flexibility (you can generally access your money when you need it) and growth potential, which is as critical in retirement as it is when you are saving for it, because you may need these assets to last 25 years or more. If you are withdrawing essential income regularly then this could be adversely affected by market falls, in that you may have to draw less income or you could be selling more units to provide the same level of income if prices have fallen. This would then affect the amount of total capital and therefore how long it is estimated to last. Drawing from cash Upon retirement, some individuals may wish to seek maximum security and protection for their retirement fund by using cash funds. Although the funds are seemingly secure, it is worth bearing in mind that they will enjoy little growth and the funds may deplete significantly faster, when making withdrawals, than if held in a managed investment portfolio where there is some opportunity for growth as well as loss. Banks were once considered the ultimate safe haven for investing money, providing safety for a small return. However, in recent years there have been a number of failures of high- profile banks. In response to this various governments around the world have implemented or adjusted their deposit insurance schemes. Depositors funds may therefore be protected, but usually up to a specified limited. An overview of the different levels of depositor protection can be found here: http://en.wikipedia.org/wiki/deposit_insurance. Investment Planning in Retirement Page 5 of 8
Income mix You can also use a mixture of different types of income-generating investments: fixed- income annuities, variable annuities, and a portfolio that includes stocks, bonds, and short- term investments. Everyone's situation is unique, so there's no one Income mix that will work for all investors. You ll need to determine what's more important to you in retirement growth potential, guarantees, flexibility, or potential preservation to help you pinpoint your income mix. For instance, more growth potential can mean settling for less guaranteed income. With more guarantees, you get less growth potential and less flexibility. The following table provides a summary of the different types of investment: Income Class Growth potential Guaranteed income payments Access to money Withdrawals from investment portfolio Yes No Yes Fixedincome annuity Variable annuity No Yes Lifetime or period payment Amounts may fluctuate. Lifetime payments and minimum payment amounts may be available at extra cost. No Longevity protection Potentially but not guaranteed Yes Inflation protection Potentially but not guaranteed Potentially, at additional cost Varies Yes Varies Suitable if you Are comfortable with market volatility Want growth potential rather than fixed income payments Want to pass assets on to beneficiaries Want low risk Want certainty of known regular income amounts Have a history of longevity in your family Need to cover essential expenses Want opportunity for income to grow Want professional management of investments Have a history of longevity in your family Are comfortable with fluctuations in income amounts and account value These are just general examples of income strategies. The life of an investor's portfolio will vary based on actual returns, withdrawals, and taxes. Keep in mind that asset or income allocation alone does not ensure a profit or guarantee against loss in a variable annuity. Investment Planning in Retirement Page 6 of 8
Next Steps Using your retirement account once you retire requires careful thought and an assessment of what you want from your capital in terms of withdrawals. Also, how to preserve the value of your capital for as long as possible Asking yourself the following questions can help you think through what's important to you: To get guaranteed income, would I be willing to give up access to a portion of my assets? Do I need income that is guaranteed to last my lifetime? Do I, or will I at some point in the future, need income immediately? How important is it to leave a financial legacy when my spouse or I pass away? Do I want my portfolio's income potential protected from down markets? Do I understand that investing in cash is not always as safe as it sounds the value of my capital could erode over time? Am I willing to accept ups and downs in the value of my assets or income in exchange for growth potential? Do I have longevity in my family? The answers to these questions will help you decide how to use the income options available within the plan to meet your needs most successfully. Important Information The retirement planning information contained herein is general in nature and should not be considered legal, tax or investment advice. Guarantees are subject to the claims-paying ability of the issuing insurance company. Investing in a variable annuity involves risk of loss investment returns, contract value, and, for variable income annuities, payment amounts are not guaranteed and can fluctuate. This guide has been produced by Punter Southall International; international retirement benefits consultants to the Board of Directors of AIARC. The information contained within this guide is based on the data provided to us by the relevant financial institutions and is subject to change. This guide is not intended as an offer to invest. The guide is based on Punter Southall International s understanding of current legislation and practice which may change in future. Punter Southall International is a trading name of Punter Southall Defined Contribution Consulting Limited. Punter Southall Defined Contribution Consulting Limited is authorized and regulated by the Financial Services Authority (FSA). Its FSA Register number is 121328, which can be checked by visiting the FSA s website www.fsa.gov.uk/register or by contacting the FSA on +44 (0) 8456 061234. Investment Planning in Retirement Page 7 of 8
Appendix A - Retirement Annuities Fixed-income annuities: guaranteed income A fixed-income annuity is a contract with an insurance company that, in return for an up- front investment, guarantees to pay you (or you and another person) a set amount of income either for the rest of your life or for a set period of time. The income could start immediately or on a future date that you select. The insurance company is obligated to make payments to you for a specific time frame you select, or if you choose a lifetime option, the payments will occur for as long as you or your spouse lives. With either the defined period or lifetime option, payments will continue to occur regardless of what happens in the financial markets. There are two things that a typical fixed-income annuity won t provide: access to the money you invested and growth potential. You give up access to the savings you used to purchase this type of annuity, which may be a problem if an unexpected expense crops up. You also forgo any market growth potential for this money. It can be useful to consider a fixed-income annuity with an annual increase to help protect your income payments from inflation. For example, if you add a 3% annual increase to your annuity, your income payments will increase by 3% every year. Although an annual increase will require additional assets when purchased or a reduced income in the early years, it may be worth it for you to have some inflation protection. Variable annuities Unlike fixed-income annuities, variable annuities have underlying investment options that provide potential for growth and may help offset inflation. A variable income annuity guarantees payments as long as you live. Depending on the specific guarantees of the annuity, these income payments may go up or down based on the performance of the underlying investments. You can pay extra for a deferred variable annuity with a guaranteed minimum withdrawal benefit to ensure that your payments won't dip below a set amount, though they may rise due to market performance. A variable annuity with lifetime income payment option may help protect you against the risk of outliving your assets. That is much harder for an investment portfolio to do on a consistent basis. As with a fixed-income annuity, you may have to give up access to savings you use to purchase certain variable annuities. Annuities can generally be purchased in US Dollars and Euros, as well as other local currencies. Illustrations can be obtained through the insurance companies that offer them, including Allianz. Further information about the range of annuity services offered by Allianz will be available from the Info Desk section of the on-line platform. You should consult your relevant financial adviser before making any decision regarding an annuity purchase. Investment Planning in Retirement Page 8 of 8