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Retirement Income Planning

Presented by:

Edward J. Barrett CFP®, ChFC®, CLU, CEBS®, RPA, CRPS®, CRPC®, CPFA

Founder, President & CEO

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[email protected]

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Disclaimer

• The information and/or the materials provided as part of this

program are intended and provided solely for informational and

educational purposes. None of the information and/or materials

provided as part of this power point or ancillary materials are

intended to be, nor should they be construed to be, the basis of

any investment, legal, tax or other professional advice. Under no

circumstances should the audio, power point or other materials

be considered to be, or used as, independent legal, tax,

investment or other professional advice. The discussions are

general in nature and not person specific. Laws vary by state and

are subject to constant change. Economic developments could

dramatically alter the illustrations or recommendations offered in

the program or materials.

3


Agenda

• Retirement Planning Overview

• Designing a Retirement Income

Plan

• Sources of Retirement Income

• Risks in Retirement Income

Planning

• Retirement Income Strategies

4


Overview of Retirement Planning

• What is retirement planning?

o “The process of determining retirement

income goals and the actions and

decisions necessary to achieve those

goals.”₁

• An exercise in balancing assets and

cash flow over the retirement period.

• Accumulation vs. Distribution

o “Distribution Engineer”

5

Source: ¹Investoppedia; ₂ Society of Actuaries, “2017 Risks and Process of Retirement Survey;

https://www.soa.org/research-reports/2018/retirement-risk-survey/

The Hoover Dam










The Five Step Retirement Plan Process

• The Discovery Process: Define goals and

objectives (client centered/listen)

• Gather Data (establish a detailed budget)

and Develop a Retirement Income Plan

• Analyze the Data and Set the Strategy

• Implement the Plan

• Monitor and Updating the Plan

6

“The first step in designing a retirement plan is to

design a retirement plan that is foolproof.”¹

Source: Jim C. Otar, Unveiling the Retirement Myth, Advanced Retirement

Planning based on Market History, (2009).


Importance of Planning for Retirement

Study by LIMRA Secure Retirement Institute, reported that pre-retirees and retirees (ages 55-75 with financial

assets of $100,000+) only 16 percent have a formal written retirement plan. Remember the saying : People

don’t plan to fail, they fail to plan. *Results based on pre-retirees.

Source: The Benefits of Retirement Planning, LIMRA Secure Retirement Institute (2016);

https://www.lifehealth.com/benefits-formal-written-retirement-plans/.

https://www.lifehealth.com/benefits-formal-written-retirement-plans/











Retirement Income Plan

• The most important part of a comprehensive

(holistic) retirement plan:

o Determine retirement income needs: match

expenses to income (“lifestyle”);

o Understand the risk factors affecting retirement

income;

o How and when to make withdrawal (spending)

choices; and

o Appropriate allocations and diversification of

the investment portfolio.

8

“Eighty-one percent of Americans say they don’t know how much

money they’ll need to fund their retirement.” ₁

Source: ₁Age Wave/Merrill Lynch (2017)


Determining Retirement Income Needs

• Methods used:

o The Income Replacement Ratio (IRR)

Method; and

o The Actual (Adjusting) Expense Method

9


The Income Replacement Ratio Method

• The IRR method uses a person’s income after retirement divided

by his or her gross income before retirement.

o The average American needs between 75% and 85% of their pre-

retirement income, based on assumptions that spending declines in

retirement.¹

• It is important to remember that the income replacement ratios

are based on what “average” people are expected to need at

retirement to maintain their pre-retirement standard of living

(lifestyle).

• The appeal of this approach is it’s simplicity.

10

Source: ¹Aon Consulting’s and Georgia State 2008 Replacement Ratio Study™;

http://www.aon.com/about-aon/intellectual-capital/attachments/human-capital-consulting/RRStudy070308.pdf.

http://www.aon.com/about-aon/intellectual-capital/attachments/human-capital-consulting/RRStudy070308.pdf












IRR Methodology

11

Source: J.P. Morgan Asset Management analysis, 2017. Household income replacement rates are derived from an inflation-adjusted

analysis of: Consumer Expenditure Survey (BLS) data (2013-2016); Social Security benefits using modified scaled earnings in 2017

for a single wage earner at age 65 and a spousal benefit at age 62 reduced by Medicare Part B premiums; and 2017 OASDI and FICA

taxes. The income replacement needs may be lower for households in which both spouses are working and the second spouse’s

individual benefits are greater than their spousal benefit. Single household income replacement needs may vary as spending is typically

less than a two-spouse household; however, the loss of the Social Security spousal benefit may offset the spending reduction.

Percentages and values may not sum due to rounding.


Consumer Expenditure Survey *

12

Average Annual Expenditures for Different Age Group s, 2015

Expenses 55-64 65-74 75+

Housing $18,188 $16,465 $14,253

Transportation $10,024 $8,028 $5,228

Food $6,992 $6,214 $4,561

Health care $5,112 $5,715 $5,814

Apparel and services $1,596 $1,331 $698

Entertainment $3,323 $3,005 $1,728

Pensions and Social Security $7,181 $3,289 $1,182

Other¹ $6,365 $5,430 $4,659

Total Annual Expenditures $58,781 $49,477 $38,123

Source: *U.S. Bureau of Labor Statistics, Consumer Expenditure Survey-2015; released August 2016; ¹ Wade Pfau, How

Much Can I Spend In Retirement? Page133; Includes cash contributions, alcohol, tobacco, personal care products and

services, reading, education, life and personal insurance, and miscellaneous expenses . Bureau of Labor Statistics, U.S.

Department of Labor, The Economics Daily, Consumer spending by age group in 2015 on the Internet at:

www.bls.gov/opub/btn/volume-5/spending-patterns-of-older-americans.htm.

http://www.bls.gov/opub/btn/volume-5/spending-patterns-of-older-americans.htm












Three Retirement Phases

13

Source: JP Morgan, Guide to Retirement Planning; The Prosperous Retirement: Guide to the New Reality,

Michael K. Stein, CFP, 1998. pp. 16-18.


Age-Banding Method (ABM)

The ABM divided a 30-year retirement into three ten year intervals₁:

14

Source: ₁‚₂ Somnath Basu, Professor of Finance at California Lutheran University, 2005, Financial Counseling

and Planning, Age-Banding: A Model for Planning Retirement Needs.

By age 85, real spending on basic expenses has fallen to about

50.4% of its pre-retirement level.₂

Inflation

Rate

Lifestyle

Adjustment

Factor @age 65

Lifestyle

Adjustment

Factor @ age 75

Lifestyle

Adjustment

Factor @age 85

Taxes 3% 0.5 1.0 1.0

Basic Living 3% 0.7 0.8 0.9

Health Care 7% 1.15 1.2 1.25

Leisure 7% 1.5 0.5 0.25


Retirement Spending Smile

15

Source: Blanchett’s Retirement Spending Smile The Estimated Path of Real Retirement Spending for a

$100,000 Initial Budget at 65 vs. Constant Inflation-Adjusted Spending Strategy.

Understanding the Path of Real

Retirement Spending by Age


Actual Expense Method

• The “actual expense method” is used to estimate after-tax

retirement income needs in current dollars and it may be a more

precise income planning method used to determine a retirement

income need. Define lifestyle:

o “Essential” Expenses (“must-have/needs”) vs. “Discretionary”

Expenses (“wants”)

• “Essential” expenses are funded with:

o Guaranteed streams of income like Social Security, pensions or

purchasing annuities¹ or TIPS to the extent necessary.

• “Discretionary” expenses are funded with:

o Less certain investments (e.g., a diversified portfolio) where

spending can be adjusted in light of the ongoing returns.

16

₁ Guarantees are backed by the financial strength and claims paying abilities of the issuing company.


Maslow Meets Retirement

17

Source: ₁Retirement Income Redesigned: Master Plans for Distribution, by Deena Katz and Harold Evensky;

Mitch Anthony, “Maslow Meets Retirement; Abraham Maslow, “A Theory of Human Motivation” (1943).

SURVIVAL MONEY

FREEDOM MONEY

GIFT MONEY

DREAM

MONEY

SAFETY MONEY

SECURITY (the need for safety, shelter, stability)

SOCIAL (the need for being loved, belonging, inclusion)

EGO (the need for self-esteem, power,

recognition, prestige)

SELF

ACUALITATION (the need for

development, creativity)

PHYSICAL (the need for air, water, food, rest, health)

“Hierarchy of

Needs”₁


The Balance Sheet: Asset-Liability Mgmt.

18

ASSETS LIABILITIES

Human Capital Fixed Expenses

Continuing Career Basic Living Needs

Part-time Work Taxes

Debt Repayment

Home Equity

Discretionary Expenses

Financial Assets Travel & Leisure

Checking Accounts Lifestyle Improvements

Brokerage Accounts

Retirement Plans Contingencies

Long-Term Care

Insurance & Annuities Health Care

Other Spending Shocks

Social Capital

Social Security Legacy Goals

Medicare Family

Company Pensions Community & Society

Family & Community


Retirement Income Optimization Plan

19

Source: Wade Pfau, Ph.D. CFA; “How Much Can I Spend In Retirement (2018).


Basic Sources of Retirement Income

• Three Legged Stool

o Social Security;

o Pensions; and

o Personal Savings

20


Social Security

• The majority of retirees (90%) report that Social Security provides a source of

income for their and their spouse’s retirement (63%) say it is a major source of

income.¹

• How do benefits compare to earnings (“Progressive”):₂

o A worker with a lifetime of “median” earnings would replace about 38% of past earnings;

A low earner would replace about 52% of prior earnings; and A worker who had

maximum earnings would replace about 25% of prior earnings. Social Security COLA

tied to the CPI-W.

• The Bipartisan Budget Act of 2015 made several changes to the “switching

strategies” for married couples:

o File and Suspend (April 29, 2016)

o Restricted Application (age 62 by 1/1/2016)

o Deemed filing rule extended to age 70

• 76% of future retirees will likely switch advisors if their advisor can’t help

maximize SS.₃

21

Source: ¹2015 Retirement Confidence Survey, Employee Benefit Research Institute and Greewwald and Associates

https://www.ebri.org/pdf/surveys/rcs/2015/RCS15.FS-2.Expects.pdf ³National Academy of Social Insurance;

https://www.nasi.org/learn/socialsecurity/benefits-compare-earnings. ₃ Nationwide Retirement Institute, Social Security Consumer Study 2015.

https://www.ebri.org/pdf/surveys/rcs/2015/RCS15.FS-2.Expects.pdf





https://www.nasi.org/learn/socialsecurity/benefits-compare-earnings







Employer Sponsored Retirement Plans

• Types of employer sponsored retirement

plans [IRC § 401(a)]:

o Defined Benefit Plans (Pension plans)

o Defined Contribution Plans (participant-

directed)

• The percentage of private sector workers

who have access to a ESRP is 66% with

a participation rate of only 50%¹

• Employer Sponsored IRAs

o SEP IRA, SARSEP IRA, SIMPLE IRA

22

Source: EBRI

https://www.ebri.org/publications/benfa

q/index.cfm?fa=retfaq14

Source: ¹Bureau of Labor Statistics, National Compensation Survey, March 2017 (http://www.bls.gov/news.release/pdf/ebs2.pdf).

Source: “Workers with access” and “Workers participating” refers to private sector wage and salary workers ages 21-64 in regards to

retirement plans: defined benefit and defined contribution. Left: U.S. Census Bureau, Bureau of Labor Statistics, Employee Benefit

Research Institute. Right: U.S. Department of Labor Form 5500 Summaries through 1998; EBRI estimates 1999-2012 using Pension

Benefit Guaranty Corporation, Current Population Survey; J.P. Morgan estimate thereafter.

https://www.ebri.org/publications/benfaq/index.cfm?fa=retfaq14




http://www.bls.gov/news.release/pdf/ebs2.pdf

http://www.bls.gov/news.release/pdf/ebs2.pdf


Retirement Plan Contribution Limits

23

Retirement Plan 2018 2017

Elective Deferrals: IRC § 402(g)(1) $18,500 $18,000

Catch-Up (age 50) Contributions: IRC § 414(v)(2)(B)(i) $6,000 $6,000

Traditional IRA: IRC § 408 / Roth IRA: IRC § 408A $5,500 $5,500

IRA Catch-Up for IRAs $1,000 $1,000

Profit Sharing, SEP IRAs Employer Contributions $55,000 $54,000

DB Dollar Limit:IRC § 415(b)(1)(A) $220,000 $215,000

SIMPLE IRA Elective Deferrals: IRC § 408(p) $12,500 $12,500

SIMPLE IRA: Catch-Up Contributions $3,000 $3,000

SEP Minimum Compensation Limit: IRC § 408 (k) $600 $600

Compensation Limit: IRC § 401(a)(17), 404(l) $275,000 $270,000

Key Employee Officer: IRC § 416(i)(1)((A)(i) $175,000 $175,000

Highly Compensated Employee: IRC § 414(q)(1)(B) $120,000 $120,000

Social Security Taxable Wage Base (SSTWB) $128,400 $127,200


Four Pillars of Retirement Income

Planning₁

• Alternative (Choices₂) Sources

of Retirement Income

o Insurance products (both Life

Insurance and Annuities)

o Working in retirement

o Home Equity (one of the largest

assets on the retirees balance

sheet for many Americans).

24

Source: ₁ Geneva Association, “Four Pillars Research Program (1987) ₂Prudential Financial, “Four Pillars of

U.S. Retirement; Retirement Choices (2005)


Working in Retirement

• Worker’s expectations to work past age 65

and even into retirement represent a dramatic

change in the long-standing vision of fully

retiring at age 65.

o More than half of workers (53 percent) expect to

work past age 65 or do not plan to retire at all.¹

• Latest data, from the U.S. Census Bureau, the

average retirement age for men is 64.6 and

women age 62.3²

• However, many retirees may retiree much

earlier.

25

Source: ¹Transamerica Center for Retirement Studies 18th Annual Retirement Survey:

www.transamericacenter.org/docs/default-source/retirement-survey-of-workers/tcrs2017_sr_three-

generations_prepare_for_retirement.pdf; ₂U.S. Census Bureau, Current Population Survey (1963-2016):

MarketWatch; https://www.marketwatch.com/story/why-the-average-retirement-age-is-rising-2017-10-09/.

Average Retirement Age,

1962-2015

U.S. Census Bureau, Current

Population Survey (1963-2016)

http://www.transamericacenter.org/docs/default-source/retirement-survey-of-workers/tcrs2017_sr_three-generations_prepare_for_retirement.pdf











https://www.marketwatch.com/story/why-the-average-retirement-age-is-rising-2017-10-09/






















Reasons for Early Retirement

26

10%

24%

4%

14%

16%

26%

41%

0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

Want to do something else

Able to afford early retirement

Outdated skills

Care for spouse or family member

Other work-related reason

Changes at company (downsizing/closing)

Health problems or disability

Reasons cited for retiring earlier than planned

Source: Employee Benefit Research Institute, Mathew Greenwald & Associates, Inc., 2017 Retirement

Confidence Survey, Data as of March 2017; JP Morgan Asset Management; 2018 Guide to Retirement, page 7.


Home Equity: Reverse Mortgages (RM)

• RM is a type of mortgage for those who are age 62 or older

(HECM….insured by FHA).

o 55 percent of net worth of Americans age 62+ tied up in Home Equity

• Following a host of recent changes to their rules, RMs have

emerged as a critical component of the retirement planning

process.

o RMs can be accessed tax-free as a lump sum, as monthly income, or

as a standby line of credit.

• This liquidity is created by borrowing against the value of the

home ($679,650 / Principal Loan Factor (PLF) in 2018) with the

flexibility to defer any repayments until after the borrower has

permanently left the home.

27

Source: Consumer Finance Protection Bureau, Reverse Mortgages Report to Congress;

http://files.consumerfinance.gov/a/assets/documents/201206_cfpb_Reverse_Mortgage_Report.pdf.

http://files.consumerfinance.gov/a/assets/documents/201206_cfpb_Reverse_Mortgage_Report.pdf

http://files.consumerfinance.gov/a/assets/documents/201206_cfpb_Reverse_Mortgage_Report.pdf


Risks in Retirement Income Planning

• Longevity Risk

• Inflation Risk

• Market Risk

• Tax Rate Risk

• Declining Cognitive Abilities Risk

• Healthcare and LTC risk

• Spending (Withdrawal) Risk

28

http://www.pensionriskmatters.com/Cut Dollar.jpg


Longevity Risk

• Most significant factor in

retirement planning and the

hardest to gauge.

o Risk of outliving one’s assets.

• The probability of a 65 year-old

male reaching age 95 is 22%

and 29% for a female, and 45%

for a least one member of an

opposite gender couple₁

29

Age 65*

1 - 20 21 +

• Longevity Risk

• Inflation Risk

• Market Risk

• Tax Rate Risk

• Declining Cognitive

Abilities Risk

• Withdrawal/Spending

Risk

Source: ₁Wade Pfau, Ph.D., CFA, “How Much Can I Spend In Retirement?” (2017); page 49; Society of

Actuaries 2012 Individual Annuitant Tables with improvements to 2017

Consequences of

Living Longer

The Longevity Illustrator www.longevityillustrator.org; Livingto100.com

http://www.longevityillustrator.org/


Inflation Risk

• Inflation creates an increased

income demand for the remainder of

a retiree’s life (worst in later years of

retirement).

o Determines the purchasing power of

retirement income

• Assets will have to continue to grow

or be forced to reduce consumption

30

At an average inflation rate of 3%, the cost of living would double every 24 years. A

retiree’s annual income will need to increase each year even during retirement in

order to keep up with the gradual rise in prices of everyday goods.

The current inflation rate in the U.S. for the

12 months ended February 2018, 2.2%, as

published by the U.S. Labor Department.

Year 0% 2% 4%

1 $1,000 $820 $676

10 $1,000 $743 $555

15 $1,000 $673 $456

20 $1,000 $610 $375

25 $1,000 $552 $308

30 $1,000 $500 $253


Market Risk

• The risk that the market will decline at

some point during retirement.

• Market risk quantifies the probability of

portfolio depletion especially when there

are constant withdrawals from the portfolio.

o Avoid market losses in the first 5-years

before retirement and the five years after

retirement.

31

An average retiree can expect to endure between three and five

bear markets during his/her retirement.¹

Source: ¹Jim C. Otar, Unveiling the Retirement Myth, Advanced Retirement

Planning based on Market History, (2009).


Mathematics of Loss

• The mathematics of loss in a distribution

portfolio works entirely different from an

accumulation portfolio.

• Each time you make a withdrawal after a loss,

you create a permanent loss in the portfolio.

o Subsequently, you need to recover from the initial

losses, as well as from these permanent losses.

o Wall Street defined: “Feeding the bear”

• Recovery in a distribution portfolio is a lot harder

– if not impossible- than in an accumulation

portfolio (less risk capacity).

32


Factors That Create Permanent Losses

• In a distribution portfolio, there are three factors that create

permanent losses:

o Sequence of returns (most important component/worst in early years

of retirement)

o Inflation (worst in later years in retirement)

o Reverse dollar cost averaging (created by cyclical trends-worst in

early years of retirement….speeds up portfolio depletion)

• Results: Time Value of Fluctuations (TVF) which is one of the

most misunderstood concepts in retirement planning.¹

33

Source: ¹Unveiling the Retirement Myth, author Jim C. Otar, page 121.


Sequence of Returns (SOR) Risk

34

Year

Client 1:

Down Market

Initially

Client 2:

Down Market

at the End

1 -20% 24%

2 -8% 18%

3 -6% 14%

4 4% 12%

5 6% 8%

6 8% 6%

7 12% 4%

8 14% -6%

9 18% -8%

10 24% -20%

Year 10 $630,178 $1,074,455

Accumulation

Distribution Portfolio: $1 million; Annual Withdrawal: $50,000;

5.1% Average Return; 50/50 Stocks/Bonds This sample is

illustrative only. It does not reflect the return of any particular

investment. Investment returns vary. Past performance does not

guarantee future returns. Distribution:

Year

Client 1:

Down Market

Initially

Client 2:

Down Market

at the End

1 -20% 24%

2 -8% 18%

3 -6% 14%

4 4% 12%

5 6% 8%

6 8% 6%

7 12% 4%

8 14% -6%

9 18% -8%

10 24% -20%

Year 10 $1,525,347 $1,525,347

Accumulation Portfolio: $1 million with average ROR of 5.1% and a

50/50 Stock/Bond portfolio. Note: From 1926 through 2016, the

compounded inflation adjusted return for a 50/50 portfolio of the S&P 500

and intermediate term gov’t bonds was 5.1%. This sample is illustrative

only. It does not reflect the return of any particular investment. Investment

returns vary. Past performance does not guarantee future returns.

Distribution


Managing Sequence of Returns Risk

• Four Approaches₁:

o Spend conservatively

o Maintain spending flexibility

o Reduce volatility (when it matters most)

Build a retirement income bond ladder

Build a lifetime spending floor w/income annuities

Ensure a rising equity glide path in retirement

Used funded ratio to manage asset allocation

Use financial derivatives to cut downside risks

o Buffer Assets (avoid selling at losses)

Cash reserve to fund near-term expenses

Cash value of life insurance

Line of credit from HECM RM

35

Source: ₁Wade Pfau, Ph.d., CFA, “How Much Can I Spend In Retirement?


Tax Rate Risk

• A key goal of tax planning is to reduce your clients effective tax rate.

o The top marginal TB of 37%, when combined with the 3.8% NIIT (Medicare

surtax*), puts higher earners at a 40.8% rate for each additional $1 over the

income threshold. High earners pay on average an effective tax rate of 26%

of every dollar of income to FIT (does not including state income taxes). ¹

• Importance of Tax Efficient Saving:

o “Don’t put all of your eggs in one basket.” (Warren Buffet)

• A tax-efficient withdrawal strategy can add up to 110 bps without any

additional risk²:

o Spend from taxable portfolios;

o Spend from tax-deferred portfolios (after taking RMDS, if required); then

o Tax-free portfolio.

36

Medicare Surtax applies to investment/unearned income over $200k for singles $250k for MFJ.

Source: ¹ IRS and the Tax Foundation; https://taxfoundation.org/summary-latest-federal-income-tax-data-2016-

update/. ²Vanguard’s, Spending from a Portfolio; and Vanguard; Putting a value on your value: Quantifying

Vanguard Advisor’s Alpha; https://advisors.vanguard.com/iwe/pdf/ISGQVAA.pdf?cbdForceDomain=true;

https://taxfoundation.org/summary-latest-federal-income-tax-data-2016-update/















https://advisors.vanguard.com/iwe/pdf/ISGQVAA.pdf?cbdForceDomain=true

https://advisors.vanguard.com/iwe/pdf/ISGQVAA.pdf?cbdForceDomain=true


Tax Rates and Brackets, 2018

37

Single Tax Brackets MFJ Tax Brackets

10% $ 0.00 - $9,525 10% $ 0.00 - $19,050

12% $9,526 - $38,700 12% $ 19,051 - $77,400

22% $38,701 - $82,500 22% $77,401 - $165,000

24% $82,501 - $157,500 24% $165,001 - $315,000

32% $157,501 - $200,000 32% $315,001 - $400,000

35% $200,001 - $500,000 35% $400,001 - $600,000

37% $500,001 – or more 37% $600,001 or more

Standard deduction: $12,000

Personal Exemption: Eliminated

Standard deduction: $24,000

Personal Exemption: Eliminated

Maximize the use of marginal tax brackets (Partial Roth IRA conversions).


Declining Cognitive Abilities Risk

• A retirement income plan must take into account

that a retiree will experience declining cognitive

(mental) abilities, hampering portfolio management

and other financial decision making.

• Two categories of intelligence that are critical to

investing:

o Fluid intelligence – the creative ability to analyze new

information and solve novel problems. Think quickly

and recall information.

o Crystallized intelligence – the ability, through life

experience, to accumulate knowledge that helps us

solve familiar problems and become better investors.

• According to Harvard Economist Professor David

Laibson, half (50%) of the 80 year old population

should not be making important financial decisions.

38


Health Care Risk

• The majority of adults admit that one of their top fears in retirement is their health

care costs going out of control (74%) and they are terrified of what health care

costs may do to their retirement plans (64%).¹

o Health care costs have risen an average of 6% above inflation annually over the past 30

years and expected to continue to increase at that level.²

o Total projected lifetime health care premiums (Part B and Part D, Medigap and dental

insurance) for a health 65-year-old couple who retired in 2017 is expected to be

$321,994 in today’s dollars ($485,246 in future dollars. Adding deductibles, copay,

hearing, vision, and dental cost sharing, that number grows to $403,253 in today’s dollars

($607,622 in future dollars).³

• Fewer than one out of six pre-retirees over the age of 50 have attempted to

forecast how much they may need to cover healthcare or long-term care

expenses.4

o Forty-three percent erroneously believe that Medicare will cover nearly all their health

care costs in retirement₅.

39

Source: ¹Nationwide Retirement Institute Survey; https://nationwidefinancial.com/media/pdf/NFM-

16070AO.pdf?_ga=2.45831910.335999654.1518453305-449323125.1518453305: ² Bureau of Labor Statistics; ₃ HealthView Service

2017 Retirement Health Care Cost Data Report; http://www.hvsfinancial.com/2017/06/12/2017-retirement-health-care-costs-data-

report/; ₄Fidelity Consulting Group ; ₅ Age Wave/Merrill Lynch.

https://nationwidefinancial.com/media/pdf/NFM-16070AO.pdf?_ga=2.45831910.335999654.1518453305-449323125.1518453305









http://www.hvsfinancial.com/2017/06/12/2017-retirement-health-care-costs-data-report/















LTC Risks in Retirement

• According to the CMS 70% of consumers over the age of 65 will need

some type of Long Term Services and Support (LTSS) at some point in

their life.₁²

o Federal law defines “long-term” to mean care provided for 90 days or more.

• LTC is the most overlooked source of retirement health-care expenses.₂

o Home Health Aide $49,188 annually; Adult Day Care $18,204 annually;

Assisted Living Facility $45,000 annually; and Nursing Home Costs (private

room) $97,452 annually.

• Less than 9 million Americans are protected with LTCI. The median age

when people buy LTC coverage is 55-64₃

• Medicare and Medigap plans don't cover most expenses for custodial

LTC.

40

Source ¹: Kaiser Family Foundation; https://www.kff.org/medicaid/report/medicaid-and-long-term-services-and-supports-a-primer.

₂Genworth Cost of Care 2017 Survey National Median costs : https://www.genworth.com/about-us/industry-expertise/cost-of-

care.html; ₃ Nationwide Retirement Institute and the American Association of Long Term Care Insurance.

https://www.kff.org/medicaid/report/medicaid-and-long-term-services-and-supports-a-primer


















https://www.genworth.com/about-us/industry-expertise/cost-of-care.html











Withdrawal (Spending) Risk

• How much to withdraw (spend) from retirement

savings from year to year is arguably the most

important piece in the retirement finance

puzzle.

o The WR refers to the percentage of the portfolio

periodically pulled out for income.

• The WR is the single most important factor of

retirement risk (portfolio longevity).

o The only direct risk factor a retiree can control.

• Methods used to measure WR*

o Backtesting Simulations

o Monte Carlo Simulation

o Bootstrapping

41

One of the key questions: “How

much can I safely withdraw

from my portfolio for the rest of

my life?”

Source: *The Efficacy of Publicly-Available Retirement Planning Tools;

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2732927


Retirement Income (Spending) Strategies

• Retirement income strategies can be

divided into the following categories:

o Systematic Withdrawal Plan Strategy

(SWP)

o Time Segmentation (The Bucket

Strategy)

o Essential-versus-Discretionary Income

(Floor and Upside (Ceiling) Strategy.

o Purchase Income (“Life”) Annuities

42


Systematic Withdrawal Plan Strategy

• SWP strategy is designed for the retiree to take pre-determined

periodic withdrawals from a portfolio of stocks and bonds with an

asset allocation based on volatility risk (50/50).

o The SWP, which is the most common strategy used by advisors,

uses a sustainable (safe) withdrawal rate (SWR) with no probability

of depletion to draw down a retiree’s financial wealth during their

retirement.

• The SWP is sometimes referred to as a “total return strategy.”

The client’s balance sheet and income needs don’t enter into the

calculation.

• Three broad categories

o Constant dollar strategy (the Bengen “4% rule”) the most popular;

o Fixed percentage strategy (Variable/Flexible spending); and

o Increasing percentage (RMD) strategy.

43


Time Segmentation

• Time Segmentation is a strategy that involves investing

differently for retirement spending goals.

o Segments retirement assets into certain categories. The categories

are based on period of time in retirement when the assets are

expected to generate income.

• Time Segmentation avoids short term SOR risk.

• The most widely used time segmentation strategy is the “Bucket”

strategy.

44


The Bucket Strategy

• Segments retirement assets by certain

categories:

o Based on the risk level of the assets, the

needs or expenses these assets are expected

to cover or the period of time in retirement

when the assets are expected to generate

income.

• Divides the retiree’s portfolio into three

segments:

o Bucket #1: Near term (1-5 years/cash/cash

equivalents)

o Bucket #2: Medium-term (5-10 years out); and

o Bucket #3: Long-term (10-30 years out/stocks).

• Protects against RDCA. Focus on long-term

investing (equities)

45


The Floor and Upside (Ceiling) Strategy

• Starts with the retirees balance sheet and their lifestyle needs:

o Match essential expenses — the Floor — with guaranteed sources

of income. This is the critical difference between the other strategies

o Match discretionary (aspirational—needs wants and wishes)

expenses with “upside portfolio.”

• Two views of Flooring:

o Goals-based approach –essential spending needs locked in with

funding from safe investments.

o Investment based (engineering view of flooring) approach – the

amount of flooring from financial capital under current market

conditions

• Sometimes referred to as the “actuarial approach”

46


The Floor and Upside (Ceiling) Strategy

47

Year 1

Annual spending

$40,000

Year 2

Ceiling

$42,000

Year 3

Initial annual spending

$42,840

Initial annual spending

$42,400

Floor

$39,000

Floor

$40,950

Ceiling

$44,100

Source: Vanguard.


Income (“Life”) Annuities

• A life annuity is a contract with an insurance company to provide

a set amount of annual (or monthly) income for as long as you

live in exchange for a large payment in the case of a single

premium immediate annuity (SPIA), or years of smaller payments

for a deferred annuity, up front.

o The least favorite strategy among consumers for funding retirement.

However, most favored by economists.

• Key Benefit: The Mortality Credit

o Transfer income from individuals with shorter than expected life

spans to those with longer life spans (mortality credits)

• Both the market risk and longevity risk are mitigated

48


1 DIAs are also known as longevity annuities and purchased during healthy years to provide income in later years when illness, dementia or other disability may set in and hinder sound income

planning decisions. 2 Some contracts contain caps on growth and limit gains attributable to account based on participation rate or other factors. 3 Guaranteed living benefits and death benefits

may be available with certain fixed and variable annuity products at additional cost. 4 While non-qualified annuities are not generally subject to RMDs, state laws requiring contract annuitization

may apply. Source: J.P. Morgan Asset Management analysis, 2017.

Understanding annuities: Which annuity may be

right for you?

49

INCOME

NOW

INCOME

LATER4

INCOME

LATER

OR

NEVER4

RISK

TOLERANCE

CONTRACT GROWTH

AND PAYOUT TYPE OF ANNUITY

Risk averse

investor

Risk averse/

moderate

investor

Moderate

investor

Moderate/

aggressive

investor

• Fixed rate of growth

• Fixed income payout

• Variable rate of growth

• Variable payout with

fixed minimum

• Variable rate of growth

• Variable income with

no guaranteed

minimum payout3

Single Premium

Immediate Annuity (SPIA)

Deferred Rate Annuity

Deferred Income

Annuity (DIA)

Qualified Longevity

Annuity Contract (QLAC)

Fixed Indexed Annuity

(FIA)

Variable Annuity (VA)

Investment Only

Variable Annuity (IOVA)

CHARACTERISTICS

• Single premium purchase payment

• Purchase payments grow at a fixed or market rate for a

specified period of time

• Often purchased to provide income in late retirement years1

• May transfer 25% or up to $130,000 from retirement account

to fund annuity; this amount exempt from RMDs at age 70½

Can only be invested in Fixed Annuity

• Must begin distributions by age 85 or as specified by

contract

• Account growth is tied to a particular index (i.e. S&P 500)

with a cap on growth in exchange for downside protection2

• Most contracts provide guaranteed minimum fixed growth

• Purchase payments are invested in subaccounts like mutual

funds

• Guaranteed living benefits (“GLBs”)3 may be available for

additional cost to provide minimum guaranteed account

growth and/or minimum guaranteed retirement income

• Purchase payments invested in a variety of subaccounts,

including alternatives and hedge funds

• Used for tax deferral, estate planning and asset location


50


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State Hours State Hours State Hours

Alabama 21 Kentucky 14 North Dakota 21

Alaska 21 Louisiana 21 Ohio 10

Arizona 21 Maine 21 Oklahoma 21

Arkansas 21 Maryland 21 Oregon 21

California 17 Massachusetts 21 Pennsylvania 21

Colorado 21 Michigan 21 Rhode Island 21

Connecticut 21 Minnesota 21 South Carolina 21

Delaware 17 Mississippi 16 South Dakota 10

DC 21 Missouri 16 Tennessee 21

Florida 17 Montana 21 Texas 12

Georgia 11 Nebraska 21 Utah 12

Hawaii 21 Nevada 21 Vermont 21

Idaho 21 New

Hampshire 21 Virginia 21

Illinois 12 New Jersey 21 Washington 12

Indiana 21 New Mexico 15 West Virginia 21

Iowa 21 New York 15 Wisconsin 21

Kansas 21 North Carolina 21 Wyoming 21

CFP 5 or 10 CIMA/CPWA 5 or 10

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Call 1-800-345-5669 and

ask to speak with a Self-Study

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Need More CE?

Browse our course catalog at http://selfstudyce.brokered.net and

let us help you fulfill your mandatory CE requirements.

State Hours State Hours State Hours

Alabama 20 Kentucky 12 North Dakota 20

Alaska 17 Louisiana 20 Ohio 10

Arizona 20 Maine 20 Oklahoma 20

Arkansas 20 Maryland 20 Oregon 9

California 16 Massachusetts 20 Pennsylvania 20

Colorado 20 Michigan 20 Rhode Island 20

Connecticut 20 Minnesota 20 South Carolina 20

Delaware 17 Mississippi 16 South Dakota 10

DC 20 Missouri 16 Tennessee 20

Florida 17 Montana 20 Texas 12

Georgia 10 Nebraska 20 Utah 12

Hawaii 20 Nevada 20 Vermont 20

Idaho 20 New

Hampshire 20 Virginia 20

Illinois 12 New Jersey 20 Washington 9

Indiana 12 New Mexico 15 West Virginia 20

Iowa 20 New York 15 Wisconsin 20

Kansas 20 North Carolina 20 Wyoming 17

CFP 5 or 10 CIMA/CPWA 5 or 10

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Call 1-800-345-5669 and

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