RETIREMENT PLANNING Erik Melville 603 N Indian River Drive, Suite 300 Fort Pierce, FL 34950 772-460-2500 erik.melville@raymondjames.com www.melvillewealthmanagement.com Created by Raymond James using Ibbotson Presentation Materials 2011 Morningstar, Inc. All rights reserved. Used with permission.
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
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
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
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. 2011 Morningstar. All Rights Reserved. 3/1/2011
EMPLOYERS ARE CUTTING DEFINED BENEFIT PENSION PLANS NUMBER OF DEFINED BENEFIT PLANS 1975 2007 180k 160 140 120 100 80 60 40 20 0 1975 1980 1985 1990 1995 2000 2005 Created by Raymond James using Ibbotson Presentation Materials 2011 Morningstar, Inc. All rights reserved. Used with permission.
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
RETIREES SHOULD PLAN FOR A LONG RETIREMENT PROBABILITY OF A 65-YEAR-OLD LIVING TO VARIOUS AGES 100% Male Female At Least One Spouse 75 78 81 86 50 85 88 91 25 91 93 96 0 65 Years Old 70 75 80 85 90 95 100 105 Source: Annuity 2000 Mortality Tables. Created by Raymond James using Ibbotson Presentation Materials 2011 Morningstar. All Rights Reserved. 3/1/2011
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
SOCIAL SECURITY IS UNDER STRAIN NUMBER OF BENEFICIARIES PER 100 COVERED WORKERS 60 50 40 30 20 High Cost Intermediate Low Cost 10 Historical Estimated 0 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 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. 2011 Morningstar. All Rights Reserved. 3/1/2011
INFLATION SIGNIFICANTLY ERODES PURCHASING POWER OVER TIME EFFECTS OF 3% INFLATION ON PURCHASING POWER $100k $85,873 80 $73,742 $63,325 60 $54,379 $46,697 $40,101 40 20 0 0 Years 5 10 15 20 25 30 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
INFLATION AND TAXES REDUCE RETURNS COMPOUND ANNUAL RETURNS 1926 2010 10% Stocks 9.9% Bonds Cash 8 6 6.7% 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 1926 2010 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
SUSTAINABLE WITHDRAWAL RATES VARY OVER TIME ROLLING 30-YEAR PERIODS 1926 2010 12% 10 75% Stocks/25% Bonds 50% Stocks/50% Bonds 25% Stocks/75% Bonds 8 6 4 2 Jan 1926 Dec 1955 1931 1960 1936 1965 1941 1970 1946 1975 1951 1980 1956 1985 1961 1990 1966 1995 1971 2000 1976 2005 1981 2010 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
WITHDRAWAL RATE YOU CAN SUSTAIN MAY BE LOWER THAN YOU THINK AVERAGE: 1926 2010 6% 6.14% 5 5.30% 4.44% 4 3 2 1 0 75% 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
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 400 2.0 300 1.5 200 1.0 100 0.5 0 1973 1977 1981 1985 1989 1993 Aug 1993 1989 94 1985 1981 1977 1973 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 1994. 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
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 1926 2010 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
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
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 70 75 80 85 90 95 100 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
HIGH WITHDRAWAL RATES WILL QUICKLY DEPLETE YOUR ASSETS SIMULATED PORTFOLIO VALUES (90% CONFIDENCE LEVEL) $1 Mil 500k 100 50 10 Withdrawal Rate: 8% 7% 6% 5% 4% 65 Years Old 70 75 80 85 90 95 100 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
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 100 50 10 65 Years Old 70 75 80 85 90 95 100 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
POTENTIAL SHORTFALL: THE RISK OF HIGH WITHDRAWAL RATES ANNUAL INFLATION-ADJUSTED WITHDRAWAL AS A % OF INITIAL PORTFOLIO WEALTH $500k 400 300 200 100 0 Withdrawal Rate: 9% 8% 7% 6% 5% 1973 1975 1980 1985 1990 1995 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. 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. 2011 Morningstar. All Rights Reserved. 3/1/2011
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 9 8 74 75 77 Portfolio Stocks Bonds Cash 50% 40 10 7 79 6 82 5 86 4 94 3 100+ Age 65 70 75 80 85 90 95 100 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
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
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 (2004 2010) Source: Prudential, 2010 24
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
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
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
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
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
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
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
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
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
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. 2011 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC 2011 Raymond James Financial Services, Inc., member FINRA/SIPC
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. 2011 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC 2011 Raymond James Financial Services, Inc., member FINRA/SIPC