View
216
Download
1
Category
Preview:
Citation preview
Copyright 2011. T. Rowe Price. All Rights Reserved.
The Road to Retirement
Presented by:
Copyright 2011. T. Rowe Price. All Rights Reserved. 2
This presentation has been prepared by T. Rowe Price Retirement Plan Services, Inc., for informational purposes only. T. Rowe Price
Retirement Plan Services, Inc., its affiliates, and its associates do not provide legal or tax advice. Any tax-related discussion contained in this presentation, including any attachments, is not intended or written to be
used, and cannot be used, for the purpose of (i) avoiding any tax penalties or (ii) promoting, marketing, or recommending to any other
party any transaction or matter addressed herein. Please consult your independent legal counsel and/or professional tax advisor regarding
any legal or tax issues raised in this presentation.
Copyright 2011. T. Rowe Price. All Rights Reserved. 3
What we’ll cover today: the big questions…
• How much do I need to save?
• How much can I withdraw?
• What should I invest in after retirement?
• How do I know if I am on track?
• If I am off track, what can I do?
Copyright 2011. T. Rowe Price. All Rights Reserved. 4
Retirement planning is all about trade-offs - finding the right balance between
an appropriate withdrawal strategy, a time horizon, and an investment allocation.
Copyright 2011. T. Rowe Price. All Rights Reserved. 5
Sources of income in retirement – average retiree
Source: Social Security Administration, Income of the Aged Chartbook, 2008, Page 16.
Totals do not necessarily equal the sum of rounded components.
Social Security37%
Wages30%
Retirementplans18%
Taxable savings
13%
Other 3%
Copyright 2011. T. Rowe Price. All Rights Reserved. 6
The big question…
How much do I need to save?
8.8%
15.0%
0%
5%
10%
15%
20%
Recommended Actual
EmployerContribution
EmployeeContribution
Gap
Copyright 2011. T. Rowe Price. All Rights Reserved. 7
Percentage you need to save in your retirement plan
This chart shows the percentage of salary you should be saving in combination with contributions from your employer (if available) to replace about 50% of your current salary in retirement. The results are based on your age and how much you have already saved, assuming you retire at age 65. For example, if you are 45 years old and have already saved one-half of your salary, you need to save at least 37% of your salary each year from now until your retirement date. The chart assumes your salary increases 3% annually for inflation and that you earn 7% on your investments in a tax-deferred account before retirement. When you retire, it assumes your initial withdrawal amount will be 4% of your balance at that time.
Amount You Have Already Saved For Retirement
0 no
savings
1/2x annual salary
1x annual salary
1 1/2x annual salary
2x annual salary
2 1/2x annual salary
3x annual salary
Cu
rrent A
ge
45 41% 37% 34% 30% 27% 23% 20%
50 61% 56% 52% 48% 43% 39% 35%
55 100% 95% 89% 83% 77% 71% 65%
Copyright 2011. T. Rowe Price. All Rights Reserved. 8
Let’s take a closer look at your income that could come from your retirement plan
Source: Social Security Administration Income of the Aged Chartbook, 2008, Page 16.
Totals do not necessarily equal the sum of rounded components.
Taxable savings
13%Social Security
37%
Wages30%
Taxable savings
13%
Other 3%
Retirementplans18%
Copyright 2011. T. Rowe Price. All Rights Reserved. 9
Current pretax salary• Less Social Security payments• Less amount being currently saved
for retirement
100% Salary -• 8% Social Security and Medicare* -• 15% for retirement• 77% salary (+/-)
* The Social Security component of the 2011 FICA tax drops temporarily from 6.2% to 4.2% for employees only, while remaining at 6.2% for employers. The employee amount is scheduled to rise back to equal the employer amount again in 2012. The Social Security wage base limit of $106,800 and 1.45% tax portion for Medicare, which has no wage base limit, remain the same. This illustration demonstrates employee rates of 6.2% for Social Security plus 1.45% Medicare.
Arriving at 75% replacement income
SocSec8%
Income77%
Savings15%
Copyright 2011. T. Rowe Price. All Rights Reserved. 10
The big question. . .
How much can I withdraw?
9-10%
4%
0%
5%
10%
15%
20%
Recommended Actual
Gap
Copyright 2011. T. Rowe Price. All Rights Reserved. 11
Rule of Thumb
• 4% of your balance the first year of withdrawals
• Assumes you begin withdrawals at age 65
• Increase that dollar amount by 3% each subsequent year
Example
• I have $500,000 saved
• 1st year: $20,000 withdrawal ($500,000 x 4%)
• 2nd year: $20,600 ($20,000 x 1.03)
• 3rd year: $21,218 ($20,600 x 1.03)
How much can I withdraw?
Copyright 2011. T. Rowe Price. All Rights Reserved. 12
Your recommended initial withdrawal percentage depends on
your age when you begin withdrawals
How much can I withdraw?
Age when you begin withdrawals
Recommended initial withdrawal percentage
55-59 3.0%
60-64 3.5%
65-69 4.0%
70-74 5.0%
75-79 6.0%
Copyright 2011. T. Rowe Price. All Rights Reserved. 13
Myth:
“I should invest in conservative funds and keep a cash balance.”
Fact:
Think about an asset allocation strategy for a long retirement
The big question…
What should I invest in after retirement?
Copyright 2011. T. Rowe Price. All Rights Reserved. 14
Life expectancy factor is increasing
8786
84.285.2
91.891.2
90.990.4
80
81
82
83
84
85
86
87
88
89
90
91
92
93
Age 50 Age 60 Age 65 Age 70
Individual Couple
Age in 2010
Lif
e ex
pec
tan
cy a
ge
Source: 2010 IRS Publication 590
Copyright 2011. T. Rowe Price. All Rights Reserved. 15
Inflation is the “silent risk”
Investing in stocks during retirement may help to counter the long-term effects of inflation
What Does $1,000 Really Buy You in the Long Run?
Inflation Rate During Each Year of Retirement
Year # 0% 3% 4%
1 $1,000 $971 $962
5 $1,000 $863 $822
10 $1,000 $744 $676
15 $1,000 $642 $555
20 $1,000 $554 $456
25 $1,000 $478 $375
30 $1,000 $412 $308
35 $1,000 $355 $253
Assuming a 4% inflation rate, in 15 years, $1,000 may buy about 1/2 of what it could buy today. And in 30 years, that $1,000 may be reduced to
about 1/3 of its original value.
Copyright 2011. T. Rowe Price. All Rights Reserved. 16
You want to figure out how long your savings will last – and what you can do to make it last longer.
Let’s take a look at an example…
The big question…
How do I know if I am on track?
Copyright 2011. T. Rowe Price. All Rights Reserved. 17
Example: Mary, a pre-retiree
Mary can put in her current
Information:• Age,• Salary,• Expected retirement date,• Expected retirement
income.
Copyright 2011. T. Rowe Price. All Rights Reserved. 18
Mary’s retirement projections
…and see if it will create a sustainable retirement income
See Monte Carlo disclosure for the assumptions used in this example
Copyright 2011. T. Rowe Price. All Rights Reserved. 19
Mary has a 32% chance of running out of money in retirement!
See Monte Carlo disclosure for the assumptions used in this example
Copyright 2011. T. Rowe Price. All Rights Reserved. 20
Mary can look at the impact of different activities
By making changes
such as:• Increasing
contributions,• Delaying retirement, or• Changing asset
allocation,
Mary can have a big
impact on her retirement
Income.
See Monte Carlo disclosure for the assumptions used in this example
Copyright 2011. T. Rowe Price. All Rights Reserved. 21
And see how they would affect her ultimate retirement success
See Monte Carlo disclosure for the assumptions used in this example
Copyright 2011. T. Rowe Price. All Rights Reserved. 22
Monte Carlo Disclosure Page 1
Monte Carlo SimulationMonte Carlo simulations model future uncertainty. In contrast to tools generating average outcomes, Monte
Carlo analyses produce outcome ranges based on probability, thus incorporating future uncertainty. In this example, savings data are based on average outcomes and retirement income data on Monte Carlo analysis.
Material AssumptionsThe investment results shown in the charts on slides 30 and 31 were developed with Monte Carlo modeling
using the following material assumptions:The underlying long-term expected annual return assumptions for the asset classes indicated in the charts
are not historical returns but are based on our best estimates for future long-term periods. Our annual return assumptions take into consideration the impact of reinvested dividends and capital gains.
We use these expected returns, along with assumptions regarding the volatility for each asset class, as well as the intra-asset class correlations, to generate a set of simulated, random monthly returns for each asset class over the specified time.
These monthly returns are then used to generate thousands of simulated market scenarios. These scenarios represent a spectrum of possible performance for the asset classes being modeled. The success rates are calculated based on these scenarios.
We do not take any taxes or required minimum distributions (RMDs) into consideration, and we assume no early withdrawal penalties.
Investment expenses in the form of an expense ratio are subtracted from the expected annual return of each asset class. These expenses are intended to represent the average expenses for a typical actively managed fund within the peer group for each asset class modeled.
Material LimitationsMaterial limitations of the investment model include:Extreme market movements may occur more frequently than represented in our model.
Some asset classes have relatively limited histories. While future results for the three asset classes in the model may materially differ from those assumed in our calculations, the future results for asset classes with limited histories may diverge to a greater extent than the future results of asset classes with longer track records.
Copyright 2011. T. Rowe Price. All Rights Reserved. 23
Monte Carlo Disclosure Cont.
Market crises can cause asset classes to perform similarly over time, reducing the accuracy of the projected portfolio volatility and returns. The model is based on the long-term behavior of the asset classes and therefore is less reliable for short-term periods.
The model assumes there is no correlation between asset class returns from month to month. This means that the model does not reflect the average periods of “bull” and “bear” markets, which can be longer than those modeled.
Inflation is assumed to be constant; variations in inflation levels are not reflected in our calculations.
The analysis does not take into consideration all asset classes, and other asset classes not considered may have characteristics similar or superior to those being analyzed.
Model portfolio ConstructionSeven model portfolios were designed for effective diversification among asset classes. Diversification
theoretically involves all asset classes: equities, bonds, real estate, foreign investments, commodities, precious metals, currencies, and others. Because investors are unlikely to own all these assets, we selected those most appropriate for long-term investors: stocks, bonds, and short-term bonds. We then chose seven sub-asset classes for the model portfolios: large-cap, small-cap, and international stocks and short-term, investment-grade, high yield, and international bonds. We did not consider real estate because of its illiquidity and investors' potential exposure from homeownership. We believe the selected fixed income sub-asset classes fairly represent the domestic capital markets. Short-term investment-grade bonds were chosen for stability, eliminating a cash allocation because investors are best able to decide that according to their near-term needs. The portfolios were built using the complementary behavior of sub-asset classes over long periods of time, enabling more efficient investment mixes through low correlations.The initial withdrawal amount is the percentage of the initial value of the investments withdrawn on the first day of the first year. In subsequent years, the amount withdrawn grows by a 3% annual rate of inflation. Success rates are based on simulating 10,000 market scenarios and various asset allocation strategies. The underlying long-term expected annual return assumptions (without fees) are 10% for stocks; 6.5% for intermediate-term, investment-grade bonds; and 4.75% for short-term bonds. Net-of-fee expected returns use these expense ratios: 1.211% for stocks; 0.726% for intermediate-term, investment-grade bonds; and 0.648% for short-term bonds.
Copyright 2011. T. Rowe Price. All Rights Reserved. 24
Monte Carlo Disclosure Cont.
IMPORTANT: The projections or other information generated by the T. Rowe Price Investment Analysis Tool regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. The simulations are based on a number of assumptions. There can be no assurance that the projected or simulated results will be achieved or sustained. The charts present only a range of possible outcomes. Results may vary with each use and over time, and such results may be better or worse than the simulated scenarios. Clients should be aware that the potential for loss (or gain) may be greater than demonstrated in the simulations.
These results are not predictions, but they should be viewed as reasonable estimates. Source: T. Rowe Price Associates, Inc.
Copyright 2011. T. Rowe Price. All Rights Reserved. 25
Adversity is a fact of life. It can’t be controlled. What we can control is how we react to it.
Copyright 2011. T. Rowe Price. All Rights Reserved. 26
What are two things in your control if you are not on track?
Source: Social Security Administration Income of the Aged Chartbook, 2008, Page 16
Totals do not necessarily equal the sum of rounded components.
Social Security37%
Wages30%
Retirementplans18%
Taxable savings
13%
Other 3%
Copyright 2011. T. Rowe Price. All Rights Reserved. 27
Myth:
“You should start taking Social Security payments as soon as possible.”
Delaying the age that you begin receiving Social Security payments can help reduce your biggest risk as a retiree:
• Running out of money during your retirement years!
The benefit of delaying Social Security income
Copyright 2011. T. Rowe Price. All Rights Reserved. 28
The impact of delaying Social Security benefits
Social Security benefits calculated using the Quick Calculator on the ssa.gov web site (assuming a0% Relative Growth Factor). This assumes an individual who is age 62 in 2011 (with a full retirementage of 66) who is continuing to work and earning $100,000 each year until benefits begin. Each yearthis individual continues working, his annual retirement income from Social Security would increase by about 8% (plus annual Cost Of Living Adjustments from the Social Security Administration) - regardless of how much of he saves or market performance.
Sources: T. Rowe Price Associates; Social Security Administration.
Age Initiating Social Security Benefits
Current Dollars Inflated Dollars
Annual Benefits% Increase Over
Age 62 Annual Benefits% Increase Over
Age 62
62 $20,976 ------- $20,976 -------
63 $22,368 7% $22,632 8%
64 $24,348 16% $25,248 20%
65 $26,352 26% $28,080 34%
66 $28,308 35% $31,080 48%
67 $30,648 46% $34,656 65%
68 $32,976 57% $38,448 83%
69 $35,304 68% $42,456 102%
70 $37,632 79% $46,692 123%
Copyright 2011. T. Rowe Price. All Rights Reserved.
Impact of delaying Social Security
Total Security Benefits Received, in Current Pretax Dollars, Depending on Age of Onset
Assuming $20,976 Annual Benefit at age 62; and $37,632 at age 70.
$790,272
$413,952
$37,682
$608,304
$398,544
$188,784
$0 $200,000 $400,000 $600,000 $800,000 $1,000,000
90
80
70
Ret
iree
's A
ge
Total Social Security Benefits Received
Take Benefits at Age 62
Take Benefits at Age 70
Copyright 2011. T. Rowe Price. All Rights Reserved. 30
Impact of working longer
0
10
20
30
40
50
60
70
80
90
100
62 63 64 65 66 67 68 69 70
Age start taking withdrawals
0% Savings Rate
15% Savings Rate
25% Savings Rate
% I
ncr
ease
in
ret
irem
ent
inco
me
(cu
rren
t d
oll
ars)
The Impact of Working and Saving Longer on Retirement IncomeCumulative percentage gain in retirement income from investments at two savings rates
(current dollars)
The study assumes an annual salary of $100,000 with $500,000 in tax-deferred savings as of age 62 and an inflation
rate of 3%; an asset allocation of 40% stocks, 40% bonds, and 20% short–term bonds and cash; and a 90% probability
that income will be sustained until at least age 95. Portfolio performance based on Monte Carlo probability analysis.
Copyright 2011. T. Rowe Price. All Rights Reserved. 31
Combined impact
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
63 64 65 66 67 68 69 70
Age initiating withdrawals and Social Security
% I
ncr
ease
in
Ret
irem
ent
Inco
me
(in
cu
rren
t d
oll
ars
) 0% Savings Rate
5% Savings Rate
10% Savings Rate
The Combined Impact of Working Longer And Delaying Social Security Cumulative increase in retirement income from investments and Social Security for each year after age 62.
This chart shows the cumulative percentage increase in total retirement income from both working longer and delaying Social Security for each year beyond age 62, depending on whether 10%, 5%, or 0% of wages is invested each year. Assumes a couple both aged 60, earning $100,000 ($60,000 plus $40,000), and who contributed 15% through age 61, with a savings of $500,000 at age 60 growing at 7%. First-year savings withdrawal assumptions based on age retiring - 3.5% at age 62 through 4.5% at age 70, each year of delay adding 0.1%. Initial withdrawal amounts increased each year thereafter for inflation (3%). Social Security payments calculated using the Quick Calculator (assuming a 0% Relative Growth Factor) on the ssa.gov web site. All figures shown in present value, discounted 3% for inflation.
Chart is for illustrative purposes only and does not represent the performance of any particular investment.
Copyright 2011. T. Rowe Price. All Rights Reserved. 32
Make adjustments now for benefits later
• Contribution rate
• Investment strategy
Consider future adjustments
• Part-time work in retirement
• Standard of living in retirement
• Delay your retirement date
Not on track?
Copyright 2011. T. Rowe Price. All Rights Reserved. 105063 33
Conclusion
• Remember: Focus on what you can control!
More Resources:
• Social Security Administration
• ssa.gov
• Retirement Income Calculator
• troweprice.com/ric
Recommended