Income Mindsets Why segmentation is key to winning in the Baby Boomer market 1678298 (1/11/18) 1
Retirement income isn t one-size-fits-all 2
Retirement planning and advice is different, too. Accumulation Phase Distribution Phase Investment Products Client Service Investment Products Client Service Healthcare Issues Relationship Management Asset Allocation Relationship Management Cash Management Social Security Insurance Products Retirement Plans/ IRA Rules Source: New York Life analysis of Retirement Solutions: Achieving Success in the Retirement Income Market; The Financial Advisor Guidebook 1.0, Raymond James, 2014. 3
Success in the retirement income market requires a new approach. 1. Meet the income mindsets 2. Learn new insights about each 3. See where guaranteed income fits in 4
Meet the income mindsets. Individuals may want to: Reduce Risk Increase Income Stay Flexible Their mindset: Worriers Generation More What Ifs 5
Worriers want to reduce risk in retirement. They are concerned about: Outliving their savings Market volatility eroding their nest egg Covering their expenses Not being able to keep up with inflation and rising health care costs Worriers 6
Retirees face different financial risks Accumulation Phase Distribution Phase Investment risk Investment risk Sequence of return risk Sequence of return risk Longevity risk Longevity risk Withdrawal rate risk Withdrawal rate risk Worriers 7
Market risk and sequence of returns risk can affect retirement portfolio balances. Worriers 8
Market risk and sequence of returns risk can affect retirement portfolio balances. This is a hypothetical portfolio with the same average return but different sequence if returns Worriers 9
Market risk and sequence of returns risk can affect retirement portfolio balances. This is a hypothetical portfolio with the same average return but different sequence if returns Worriers 10
Longevity risk means retirement assets need to last longer. Worriers 11
Withdrawal rate risk means outliving savings is a real possibility. Withdrawal Rate Hypothetical illustration-not specific to the performance of any product. Assumptions: Hypothetical annual return assumption 6.4%. Source: Ibbotson SBBI 2015 Classic Yearbook, average of Long Term Corporate Bonds from 1926-2014. Annual withdrawals adjusted for 3% inflation. Past performance is no guarantee of future results. Source: New York Life Insurance Company 2015. Worriers 12
Rising health care costs remain top of mind for many. Worriers 13
Supply of secure retirement income is diminishing Carrier pull back on living benefits Unoptimized Social Security benefits Decline of pensions VA carriers de-risk or exit market completely Age 62 is the most popular time to start taking benefits, accounting for 50% of claims by women & 45% of claims by men in recent years. * American workers retiring with pensions: 1980: 80% Today: 25% * Source: Bank of America Merrill Lynch, 2015. Worriers 14
Boomer age wave drives market demand Population Growth by Age: 60.0% 50.0% 2000-2010 Retirement Opportunity 40.0% 30.0% 20.0% 10.0% 0.0% -10.0% -20.0% 25 34 35 44 45 54 55 64 65 74 Source: US Census Bureau, 2012. Worriers 15
Boomer age wave drives market demand Population Growth by Age: 60.0% 50.0% 2010-2020E Retirement Opportunity 40.0% 30.0% 20.0% 10.0% 0.0% -10.0% -20.0% 25 34 35 44 45 54 55 64 65 74 Source: US Census Bureau, 2012. Worriers 16
Generation More wants to turn a good retirement into a great one. They want to: Maintain their lifestyle Make sure their basic expenses, which include internet, travel, and professional hair color, are always covered Feel confident spending in retirement Generation More 17
Retirement is a tale of two cities: Income exceeds spending at every age in retirement for your clients Net Spenders: 25th Percentile (Average of $2,786 in investable wealth at age 65 69.9) $40K $35K $30K $25K $20K $15K $10K $5K $K 55-59.9 60-64.9 65-69.9 70-74.9 75-79.9 80-84.9 85+ $120K $100K Net Savers: 75th Percentile (Average of $284,270 in investable wealth at age 65 69.9) $80K $60K $40K $20K $K 55-59.9 60-64.9 65-69.9 70-74.9 75-79.9 80-84.9 85+ Income Consumption Source: New York Life analysis of data from University of Michigan Health and Retirement Study, 2014 Generation More 18
I wish I could, but I just can t afford it right now. Generation More 19
Certainty is Created by Reducing the Unknown Retirees who own long term care insurance consume more across every spending category than similarly-situated retirees without long term care insurance. Median spending for Individuals 65+ $40K $35K $30K $25K $20K $15K $10K $5K $K Do Not Own LTCi Own LTCi Health Home Related Food Transportation Cloth/Ent/Other Source: New York Life analysis of data from the Employee Benefit Research Institute's (EBRI) "Expenditure Patterns of Older Americans, 2001-2009" by Sudipto Banerjee, 2014 Generation More 20
Today s retirees expect more out of retirement Health Care Internet 98% 84% Shopping 66% Pet Care 51% Vacation 50% The New Basic Expenses Weekend Getaway 46% Prof. Hair Color 43% Kids Education 42% Dining Out 38% Travel 35% Ordering Takeout Tech. Source: Consumer Retirement Income Planning Study, conducted by MainStay Investments and Harris Interactive 34% 31% Generation More 21
What Ifs want to stay flexible. They need to be able to: Access their money when they need to Spend more or less each year of retirement based on changing needs Change their planned retirement date Fund their retirement over time Generation More 22
Retirees rank control of their money highest when it comes to income solutions 1. Control of my money 2. Safety of principal 3. Keeps pace with inflation 4. Easy access to my money 5. Income payments cannot be outlived 6. Investments are easy to understand. 7. Limited taxes 8. High growth potential 9. Pays a guaranteed fixed monthly amount 10. Leaving behind money for kids or grandkids Source: New York Life analysis of survey conducted by Mathew Greenwald & Associates, Inc. and The Diversified Services Group, Inc., 2014 What Ifs 23
Client behavior indicates demand for income flexibility Source: New York Life, 2015 What Ifs 24
If they could do it again, 46% of retirees would retire earlier Retirees with at least $100,000 in investable assets were asked: If you could ensure the same level of financial security you had when you actually retired, would you retire early? And if so, how much earlier? 46% said yes Average of four years earlier 74% said they would be interested in financial solutions that could have helped make it possible Add time to the front end of retirement with proper planning Press Coverage, April 2015* Some retirees say: Retire as soon as you can 4 Money Moves For A Happier Retirement Nearly half of retirees wish they had retired earlier This is the retirement regret nobody talks about Retirees to Pre-Retirees: Add years to the front end of your retirement while you can Source: New York Life and Ipsos Retire Sooner Survey, 2015 *Also covered by WSJ MoneyBeat, Bankrate.com, Debt.com, NextAvenue, BenefitsPro, Financial Planning, PlanSponsor, and Think Advisor. What Ifs 25
Position guaranteed income solutions based on mindset. 26
Once you know a client s mindset, use talking points that directly address needs and concerns. Reduce Risk Increase Income Stay Flexible Worriers Generation More What Ifs Let s review your plan and make sure your most important retirement expenses are covered by income you can t outlive or lose in the market. Tell me more about what you want to do in retirement. I want to make sure you re set up to be able to do it all. Retirement isn t just one big decision about how you ll spend your money it s lots of little ones. Let s talk about how you can stay flexible over the next 30+ years. 27
Address retirement risks for the Worriers. Retirement Concern How can I make sure I don t run out of money? How much money should I withdraw? How will the market affect my nest egg? Talking Point Payments from an income annuity last as long as individuals need them to. Lifetime income annuities are steady, simple payments guaranteed to last for life individuals can worry less about drawing from their assets too quickly. Income annuities are free from market risk. How can I protect against inflation? Many income annuities offer inflation protection. What can I do to prevent against rising health care costs? Income annuities can be a way to guarantee that some assets are dedicated to health care costs. 28
Show Generation More how they can get more in retirement. Retirement Concern I want to maintain my lifestyle. Talking Point Lifetime income annuities are steady, simple payments guaranteed to last for life individuals can worry less about drawing from their assets too quickly. How do I turn a good retirement into a great retirement? What about the rest of my portfolio? How do I help ensure my loved ones are taken care of? More guaranteed income in addition to existing sources of guaranteed income (like Social Security and pensions) can help transform a retirement. Adding an income annuity can take the pressure off a retirement portfolio. By decreasing the income risk, individuals can invest more of their portfolio for growth. Income annuities can be purchased with death benefits and can also be set up to create a multi-generational income strategy. 29
Help the What Ifs understand an annuity s flexibility. Retirement Concern What if I need access to my money? What if I need more/less income? What if I decide to change my planned retirement date? Talking Point Many offer liquidity options Some offer access to cash value Many offer options to accelerate or decelerate payment amounts Some offer the option to change income start dates What if I want to purchase retirement income over time? Many offer flexible premium payment options Have the option to ladder (purchase annuities over time) 30
Retirement Building Blocks: Sustainable Income Classes For the affluent, retirement portfolios include income from four income classes that can generate sustainable income for a lifetime without risk of exhaustion. Fixed Income Coupon income from Municipal Bonds Government Bonds Corporate Bonds Equity Income Dividend income from Dividend Stocks Traditional *Insured income refers to guaranteed income backed by the claims-paying ability of the company issuing the financial product, usually an insurance company. Lifetime payouts from Income Annuities Deferred Income Annuities Lifetime withdrawals from Variable Annuities with Guaranteed Living Benefits (GLBs) Fixed Indexed Annuities with GLBs Insured * 31
Client Needs Drive Income Class Selection Depending on the client objective, risk tolerance, and time horizon, different income classes may be appropriate. Hypothetical Income Class Performance Client s Objective Metric 1 st 2 nd 3 rd 4 th More Income Average Annual Income 1 Insured Fixed Income Traditional Fixed Income Insured Equity Income Traditional Equity Income More Income Stability Standard Deviation of Annual Income 2 Insured Fixed Income Insured Equity Income Traditional Equity Income Traditional Fixed Income More Capital Growth Capital Growth 3 Traditional Equity Income Traditional Fixed Income Insured Equity Income Insured Fixed Income Because of the purely hypothetical nature of the information presented based on certain assumptions, it does not represent any specific product; no client actually had, or could have had, the results and income characteristics shown for a specified period. This is based on historical data as described on the Assumptions page - see Appendix. Past performance is no guarantee of future results. 1 Average Annual Income: The average annual income generated across a 30 year retirement period. 2 Standard Deviation of Average Annual Income: The standard deviation of annual income across a 30 year retirement period. 3 Capital Growth: For a $100,000 investment, the accumulated account balance at the end of a 30 year retirement period. 32
Not all income is alike Payout rates as of 7/31/2014, Life with Cash Refund Option. This example is for illustrative purposes only. Payout rates are subject to change and may vary depending on premium amount, age, gender, and income options selected. Source: New York Life actuarial analysis. Graphical representation based on an example introduced by Dr. David Blake. 33
Income annuities aren t derailed by interest rates NYL GLI Payout Rate for 75 yearold male, Cash Refund payout option 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 7% Decline 10-Year Treasury Rate 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 26% Decline For illustrative purposes only. 34
Guarantees matter 35
Because Guarantees Make People Happier Retirees get more satisfaction from each dollar of Social Security and pension income than they do from other sources of income. Source: What Makes a Successful Retirement? Research Magazine. 2014. 36
Because Nobody Wants to Worry 14,810 13,036 Though the Dow increased nearly 2,000 points from September 2012 to the same period in 2013, investors willingness to take on more risk exposure remains virtually unchanged. Dow Jones Industrial Average (9/1/12 9/1/13) Source: Market Strategies International: Cogent Wealth Reports, Investor Brandscape, 2013. 37
Because Retirees Want Them 35% of current retirees are interested in converting a portion of their assets into a pension-like stream of income Source: Ipsos/New York Life survey of retirees, 2014 38
Use a simple decision tree to guide client to a potential solution. May be appropriate for Worriers May be appropriate for Generation More May be Appropriate for What Ifs 39
Thank you! New York Life annuities are issued by New York Life Insurance and Annuity Corporation (NYLIAC), a Delaware corporation, a whollyowned subsidiary of New York Life Insurance Company, 51 Madison Ave, New York, NY 10010. All guarantees are dependent on the claims-paying ability of the issuer. Products available in jurisdictions where approved. New York Life Clear Income Fixed Annuity is not available in New York. 40
Appendix 41
Assumptions for Efficient Income Frontier Example Portfolio Size: $1,000,000 Annual withdrawal equal to 3.5% of the initial investment and adjusted each year for a 3% inflation Asset Classes: large company stocks (S&P 500), Bonds (Citigroup Long-Term High-Grade Corporate Bond Index) Guaranteed Lifetime Income Annuity (GLI) Method: 500 Monte Carlo Simulations for each possible asset mix for the three asset classes. For Legacy Potential, the simulation is based on the life expectancy of the 50 th percentile of an individual at the client s age. For Income Risk, the simulation is based on life expectancy at the 75 th percentile. Source for life expectancy: Society of Actuaries Annuity 2000 Mortality Tables. Returns: Stocks (historical returns) 12.1% Bonds (historical returns) 6.4% Annuity: Income payments are based upon payout rates for New York Life s life-only payout option for a Male Age 65 in effect on 10/05/2015 receiving monthly payments based on an initial premium of $100,000 of greater. Although the returns are historical they are run through simulations, so that the results of the simulation relate to probabilities, not projections of future results, which are limited by the fact that past performance offers no guarantee of future results. The simulations do not account for materials factors related to the client s investment profile, nor do they account for material factors which could affect the results shown, such as how recommendations are implemented in reality, the costs of investing, and taxes. The historical returns reflect a period of steady growth in the US economy, a long term trend which is not guaranteed to continue in the future. 42 42
Assumptions for Income Class Example Traditional equity income (today, typically stocks) are large company stocks as defined by Ibbotson s SBBI 2012 Classic Yearbook. * Average annual income is based on the sum of the dividends paid over each 30-year period, divided by 30. The standard deviation of annual income is based on the dividends paid over each 30-year period. The capital growth is based on the value of a $100,000 investment after 30 years, after spending dividend income. Traditional fixed income (today, typically bonds) are long-term government bonds as defined by Ibbotson s SBBI 2012 Classic Yearbook. Average annual income is based on the sum of income generated by coupons and scheduled changes in price (premium/discount bonds moving towards par) over each 30-year period, divided by 30. The standard deviation of annual income is based on the income generated by coupons and scheduled changes in price (premium/discount bonds moving towards par) over each 30-year period. The capital growth is based on the value of a $100,000 investment after 30 years, after spending coupon income and scheduled changes in price (premium/discount bonds moving towards par). Insured fixed lifetime income (today, traditionally SPIAs) are based on hypothetical historical prices created using actuarial methods, which combine historical 10-Year Treasury interest rates and mortality rates from the Annuity 2000 mortality table, based on a 70-year-old couple. Average annual income is based on the sum of income received over the 30 year period, divided by 30. The standard deviation of annual income is based on the income received over the 30 year period. SPIAs have no capital growth. Insured equity lifetime income (today, traditionally VAs with GLBs) is a hypothetical income-producing product that has the following attributes: An investment account invested 70% in stocks and 30% in bonds (as defined above), rebalanced annually, with fees of 2.25%. Income starts at 5% of the initial investment and permanently steps up if and when the account value exceeds the benefit base, which is the previous high-water mark of the end-of-year account balance. An additional fee of 1.05% of the benefit base is also charged against the account value. Average annual income is based on the sum of income received over the 30 year period, divided by 30. The standard deviation of annual income is based on income received over the 30 year period. The capital growth is based on the value of a $100,000 investment after 30 years, after withdrawing the specified income from the account. *Ibbotson SBBI Classic Yearbook is a publication generally used by valuation professionals which provides a compilation of public data for stocks, bonds, bills and inflation. 43
Average Annual Income Hypothetical Performance Traditional Fixed Income, Insured Fixed Income, and Insured Equity Income have all taken turns at the top of the average annual income metric, with Traditional Equity Income significantly underperforming. Rank by Average Annual Income (Over 30 Year Periods Shown) Because of the purely hypothetical nature of the information presented based on certain assumptions, it does not represent any specific product; no client actually had, or could have had, the results and income characteristics shown for a specified period. This is based on historical data as described on the Assumptions page. Past performance is no guarantee of future results. 44
Standard Deviation of Annual Income Hypothetical Performance With zero standard deviation, Insured Fixed Income significantly outperformed other income classes. Rank by Standard Deviation of Annual Income (Over 30 Year Periods Shown) Because of the purely hypothetical nature of the information presented based on certain assumptions, it does not represent any specific product; no client actually had, or could have had, the results and income characteristics shown for a specified period. This is based on historical data as described on the Assumptions page. Past performance is no guarantee of future results. 45
Capital Growth Hypothetical Performance Traditional Equity Income significantly outperformed other income classes in terms of capital growth. Rank by Capital Growth (Over 30 Year Periods Shown) Because of the purely hypothetical nature of the information presented based on certain assumptions, it does not represent any specific product; no client actually had, or could have had, the results and income characteristics shown for a specified period. This is based on historical data as described on the Assumptions page. Past performance is no guarantee of future results. 46