JourneyGuide Retirement Optimization - Ash Brokeragesummit.ashbrokerage.com/files/JourneyGuide_Slides.pdf · 2016-02-22 · JourneyGuide™ - Patent Pending My rich uncle… • Gives

Income as the Outcome

JourneyGuide™ Retirement Optimization

JourneyGuide™ - Patent Pending

Why the Green Path to the Orange Number?

• Dr. Jeff Brown’s conclusion…“Income as the Outcome”

• Why do people save for retirement?

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• Shift from defined benefit to defined contribution


Myth Reality

Contributions

Withdrawals

Lump Sum

Returns

Longevity

Debunking Five Myths


Contributions

Withdrawals

Lump Sum Average

Returns

Longevity

Myth Reality



My rich uncle…

• Gives me a one-time gift of $108,726

• It’s the compound annual growth rate that matters when there’s a lump sum

Year S&P 500

1995 37.58%

1996 22.96%

1997 33.36%

1998 28.58%

1999 21.04%

2000 -9.11%

2001 -11.89%

2002 -22.10%

2003 28.68%

2004 10.88%

2005 4.91%

2006 15.79%

2007 5.49%

2008 -37.00%

2009 26.46%

2010 15.06%

2011 2.11%

2012 16.00%

2013 32.39%

2014 13.48%

Reality

$ 149,585

$ 183,929

$ 245,288

$ 315,391

$ 381,750

$ 346,972

$ 305,717

$ 238,154

$ 306,456

$ 339,799

$ 356,483

$ 412,772

$ 435,433

$ 274,323

$ 346,908

$ 399,153

$ 407,575

$ 472,787

$ 625,923

$ 710,297

CAGR

9.84%

Avg

11.73%

Using the Average

$ 121,483

$ 135,737

$ 151,664

$ 169,459

$ 189,343

$ 211,559

$ 236,383

$ 264,119

$ 295,109

$ 329,736

$ 368,425

$ 411,654

$ 459,956

$ 513,925

$ 574,226

$ 641,603

$ 716,885

$ 801,001

$ 894,986

$ 1,000,000

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ActualS&P 500

Portfolio Value

37.58% $ 149,585

22.96% $ 183,929

33.36% $ 245,288

28.58% $ 315,392

21.04% $ 381,750

-9.11% $ 346,973

-11.89% $ 305,718

-22.10% $ 238,154

28.68% $ 306,457

10.88% $ 339,799

4.91% $ 356,483

15.79% $ 412,772

5.49% $ 435,433

-37.00% $ 274,323

26.46% $ 346,909

15.06% $ 399,153

2.11% $ 407,575

16.00% $ 472,787

32.39% $ 625,923

13.48% $ 710,297

Sorted Ascending

Portfolio Value

-37.00% $ 68,497

-22.10% $ 53,359

-11.89% $ 47,015

-9.11% $ 42,732

2.11% $ 43,633

4.91% $ 45,776

5.49% $ 48,289

10.88% $ 53,543

13.48% $ 60,760

15.06% $ 69,911

15.79% $ 80,950

16.00% $ 93,902

21.04% $ 113,659

22.96% $ 139,755

26.46% $ 176,734

28.58% $ 227,244

28.68% $ 292,418

32.39% $ 387,132

33.36% $ 516,280

37.58% $ 710,297

Sorted Descending

PortfolioValue

37.58% $ 149,585

33.36% $ 199,486

32.39% $ 264,100

28.68% $ 339,844

28.58% $ 436,971

26.46% $ 552,593

22.96% $ 679,469

21.04% $ 822,429

16.00% $ 954,018

15.79% $ 1,104,657

15.06% $ 1,271,019

13.48% $ 1,442,352

10.88% $ 1,599,280

5.49% $ 1,687,080

4.91% $ 1,769,916

2.11% $ 1,807,261

-9.11% $ 1,642,620

-11.89% $ 1,447,312

-22.10% $ 1,127,456

-37.00% $ 710,297

CAGR9.84%

For a Lump Sum… Sequence Doesn’t Matter

CAGR9.84%

CAGR9.84% 11


Contributions

Withdrawals

Lump Sum Average

Returns

Longevity

Myth Reality



Contributions

Withdrawals

Lump Sum Average

Returns

Longevity

CAGR

Myth Reality



Contributions CAGR

Withdrawals

Lump Sum Average

Returns

Longevity

CAGR

Myth Reality



For Periodic Contributions … Sequence Really Does Matter!

• So, if I contribute $12,810 annually using the 11.73% average growth rate, I would have $1,000,000 in 20 years

• But let’s see what really could happen…

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27


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Contributions CAGR

Withdrawals

Lump Sum Average

Returns

Longevity

CAGR

Myth Reality



Contributions CAGR

Withdrawals

Lump Sum Average

Returns

Longevity

CAGR

Path

Myth Reality



Contributions CAGR

Withdrawals “your number”

Lump Sum Average

Returns

Longevity

CAGR

Path

Myth Reality



And, for Withdrawals … Sequence Matters Even More!

• Assuming I do accumulate $2,000,000 and continue to use the 11.73% average, I can withdraw $210,027 each year

• But let’s see what really could happen…

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44


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Contributions CAGR


Lump Sum Average

Returns

Longevity

CAGR

Path

Myth Reality



Contributions CAGR


Lump Sum Average

Returns

Longevity

CAGR

Path

Income

Myth Reality



Contributions CAGR

Withdrawals

Lump Sum Average

Returns Gross

Longevity

CAGR

Path

Income“your number”

Myth Reality



Net, Not Gross

• Invest Expenses: -0.55%

• Dividend Taxes: -0.90%

• Cap Gain Taxes: -0.63%

• Inflation: -2.88%

Source: “A Study of Real Real Returns,” Thornburg Investment Management, 2015

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Contributions CAGR

Withdrawals

Lump Sum Average

Returns Gross

Longevity

CAGR

Path


Myth Reality



Contributions CAGR

Withdrawals

Lump Sum Average

Returns Gross

Longevity

CAGR

Path


Net

Myth Reality



Contributions CAGR

Withdrawals

Lump Sum Average

Returns Gross

Longevity Life Expectancy

CAGR

Path


Net

Myth Reality



• Life expectancy is increasing about 2.5 years per decade or 15 minutes per hour

• Harold Evensky“Annuities are poised to become the most important investment vehicle of the next decade since they are about the only way retirees can manage longevity risk”

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Managing Longevity Risk


Contributions CAGR

Withdrawals

Lump Sum Average

Returns Gross


CAGR

Path


Net

Myth Reality



Contributions CAGR

Withdrawals

Lump Sum Average

Returns Gross


CAGR

Path


Net

Hedge

Myth Reality



Contributions CAGR Path

Withdrawals “your number” Income

Returns Gross Net

Longevity Hedge

Lump Sum Average CAGR

Life Expectancy

Myth Reality



If We’re Going to Model This, Do it Right!

• Expected qualified and non-qualified asset values based on Modern Portfolio Theory

• Immediate and deferred annuity payouts with exclusion ratio

• Tax consequences of rebalancing and turnover, maintaining basis for short vs. long G/L

• Path risk assessment using Monte Carlo simulations

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Doing it Right With JourneyGuide™

Determine an income level that is…

• After tax

• After inflation

• Sustainable for life

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JourneyGuide™ Case Study #1

Current Situation:

• Michael (65), average health, never married and no kids

59

• Has saved $922K (Non-Qual: $343K, Qual: $579K)

• Target a 95% confidence of having at least a dollar of assets when he is 95

• $21K of Social Security, no pension

• Moderate allocation, 60% FI / 40% Eq

• Already retired; wants to know safe income level


Generating Income – After Inflation, After Tax

Current Age: 65 (M) Income Date: Nov 2015 Balance: $922K Confidence: 95% at age 95

Current Strategy

Allocations:Annuity: 0%Fixed Income: 60%Equities: 40%

_________________

$55,000

_________________

$61,000


_________________

$65,000

Allocations:Annuity: 35%Fixed Income: 52%Eq (mid-cap): 13%

10.9% increase

18.2% increase

Revised Allocation

Introduce Annuities

Including AnnuityIncreased Annuity,Revised Allocation

60


Generating Reserves

$55,000 Inflation Adjusted, After Tax Income

All $922K Needed

$762K Needed

$722K Needed

Current Strategy

$200KReserves

$160KReserves

Including AnnuityIncreased Annuity,Revised Allocation

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Maximized Income


Current Strategy

Likelihood Of Having At Least $1 Of Assets...

Including Annuity

At Age 95 57% 91% 95%

At Age 100 39% 81% 93%

At Age 105 73% 90%

Worst Case Income At Age 100

$18,289* $32,607* $43,835*

* In today’s after-tax dollars

Increased Annuity,Revised Allocation

28%

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Income Sources – Poor Market Scenario


Current Strategy

• With asset shortfall, the only source of income is social security

• Covers 38% of after-tax need at age 84

Revised Strategy

• With asset shortfall, social security is combined with guaranteed income from the annuities


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Client Assumptions

Client:Male: 65

Spending Taper:1.5% increasing by .2% annually

From Age: 75To Age: 85

Income Strategy #1

SPIA Specs:Amount: $100KInflation Adj: 0%Account: QualifiedPurchase Date: Oct 2015

Income Strategy #2

SPIA Specs:Amount: $100KInflation Adj: 0%Account: QualifiedPurchase Date: Oct 2015

Current Portfolio:Non-Qualified: $343KQualified: $579KSocial Security: $21,768Pension: $0

Average Federal Tax Rates:Ordinary Income: 15%Capital Gains: 15%Filing Status: Individual

DIA Specs:Amount: $0Inflation Adj:Account: Purchase Date: Beginning Date:

DIA Specs:Amount: $100KInflation Adj: 3%Account: Non-QualifiedPurchase Date: Oct 2015Beginning Date: Jan 2025

Inflation: 2.0% increasing by .02% annually

State and Local Tax Rates:Ordinary Income: 3.8%Capital Gains: 3.8%

QLAC Specs:Amount: $125KInflation Adj: 3%Purchase Date: Oct 2015Beginning Date: Jan 2025

QLAC Specs:Amount: $125KInflation Adj: 3%Purchase Date: Oct 2015Beginning Date: Jan 2025

Beginning: Nov 1, 2015 Management Fees: .5%

(2,000 Monte Carlo Trials)

Simulation Modeling

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Current Situation:

• Doug (59) and Sue (58), both relatively healthy

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• Recently sold a business and have $12.3M in non-qualified assets

• Target a 95% confidence of having at least a dollar of assets when she is 95

• Expect $36K of Social Security, no pension, and no qualified assets

• Conservative allocation, 90% FI / 10% Eq

• Would like to retire asap and know how much they can safely spend



Current Age: 59 (M), 58 (F) Income Date: 07/01/15 Balance: $12.3M Confidence: 95% at younger age 95

Current Strategy


_________________

$357,000

Revised Allocation

Introduce Annuities

_________________

$397,000


11.2% increase

Including Annuity

_________________

$415,000


16.2% increase

Increased Annuity, Revised Allocation

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Generating Reserves


All $12.3M Needed

$10.9M Needed

$10.2M Needed

Current Strategy

$2.1MReserves

$1.4MReserves

Including AnnuityAnnuity with

Revised Allocation

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Maximizing Income


Current Strategy


Including Annuity

At Age 95 69% 85% 95%

At Age 100 40% 60% 85%

At Age 105 33% 66%

Worst Case Income At Age 100

$36,000* $84,000* $93,000*

* In today’s dollars

Annuity withRevised Allocation

18%

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Client Assumptions

Clients:Male: 59Female: 58



Income Strategy #1

SPIA Specs:Amount: $0Purchase Date:

Income Strategy #2

SPIA Specs:Amount: $0Purchase Date:

Current Portfolio:Non-Qualified: $12.3MQualified: $0Social Security: $36,000Pension: $0

Average Federal Tax Rates:Ordinary Income: 20%Capital Gains: 15%Filing Status: Joint

DIA Specs:Amount: $2.3MPurchase Date: June 2015Beginning Date: June 2030

DIA Specs:Amount: $3.7MPurchase Date: June 2015Beginning Date: June 2030

After-Tax Income: Yes State and Local Tax Rates:Ordinary Income: 4.3%Capital Gains: 4.3%

QLAC Specs:Amount: $0Purchase Date: Beginning Date:

QLAC Specs:Amount: $0Purchase Date: Beginning Date:

Beginning: June 2015 Management Fees: .5%

Inflation: 2.0% increasing by .02% annually


Simulation Modeling

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Current Situation:

• Anne is 55 and has some health issues

• Has saved $382K (Non-Qual: $247K, Qual: $135K)

• $5,800 of Social Security, no pension

• Moderate allocation; 50% FI / 50% Eq

• Retiring now and wants to know safe income level




Current Age: 55 (F) Income Date: Nov 2015 Balance: $382K Confidence: 95% at her age 95

Current Strategy


_________________

$18,000

_________________

$21,000


_________________

$20,800


16.7% increase15.6% increase

Bequest Protection

Introduce Annuities,

Revise Allocation

Maximized IncomeIncreased Income

with Bequest Protection

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Client Assumptions

Client:Female: 55



Income Strategy A

DIA Specs:Amount: $100KInflation Adj: 3%Account: Non-QualifiedPurchase Date: Nov 2015Beginning Date: Jan 2026

Income Strategy B

Indexed w/ GMBR Specs:Amount: $100KAccount: Non-QualifiedPurchase Date: Oct 2015Beginning Date: Jan 2026

Current Portfolio:Non-Qualified: $247KQualified: $135KSocial Security: $5,800Pension: $0Capital Infusion: $80K (2017)

Average Federal Tax Rates:Ordinary Income: 10%Capital Gains: 0%Filing Status: Individual

QLAC Specs:Amount: $18KInflation Adj: 3%Purchase Date: Nov 2015Beginning Date: Jan 2039

QLAC Specs:Amount: $18KInflation Adj: 3%Purchase Date: Nov 2015Beginning Date: Jan 2039

Inflation: 2.0% increasing by 0% annually

State and Local Tax Rates:Ordinary Income: 4%Capital Gains: 4%

Beginning: Dec 2015 Management Fees: .9%


Simulation Modeling

72



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Current Situation:

• Todd (58) and Mary (49), both in average health

• They have saved $3M (Non-Qual: $140K, Qual: $2.9M)

• Todd is retiring in 2016 and Mary expects to work another 5 years

• They will begin taking withdrawals when Mary retires

• Expect $50K of Social Security and $52K in pension

• Allocation; 30% FI / 70% Eq

• Want to know how much they can safely spend



Generating Income – After Inflation, After TaxCurrent Ages: 58 (M), 49 (F) Retirement Date: Jan 2021 Current Qual Balance: $2.9M Confidence: 95% at her age 95

Current Strategy


_________________

$112,000

_________________

$117,000


_________________

$129,000


4.5% increase

15.2% increase

Revised Allocation

Introduce Annuities

Including AnnuityIncluding Annuity,Revised Allocation

74

Only qualified assets were used in the analysis. All $140K of non-qualified were set aside as reserves.


Generating Reserves


All $2.9Mof Qualified

Assets Needed $2.7Mof Qualified Assets

Needed

$2.1Mof Qualified Assets

Needed

Current Strategy

$800KReserves

$200KReserves

Including AnnuityIncluding Annuity,Revised Allocation

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Note: $140K of non-qualified assets were set aside as additional reserves and not included in the figures above


Maximized Income


Current Strategy


Including Annuity

At Her Age 90 90% 92% 98%

At Her Age 95 85%

At Her Age 100

Worst Case Income At Her Age 95

$34,667* $45,193* $45,193*

* In today’s after-tax dollars

Including Annuity,Revised Allocation

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81%

95%88%

84% 90%


Income Sources – Poor Market Scenario

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Current Strategy

• With asset shortfall, the only source of income is social security and pension

• Covers 28% of after-tax need at her age 95

Revised Strategy

• With asset shortfall, social security is combined with guaranteed income from the annuity and pension



Client Assumptions

Client:Male: 58Female: 49



Income Strategy

DIA Specs:Amount: $300KInflation Adj: 3%Account: His QualifiedRefund: Return of premiumPurchase Date: Jan 2016Payout Begin Date: Jan 2021

*See accompanying illustration for additional details

Current Portfolio:Non-Qualified: $140KQualified: $2.9MSocial Security:

His at age 66: $30,000Her’s at age 62: $20,000

Pension: $52,000

Average Federal Tax Rates:Ordinary Income: 28%Capital Gains: 15%Filing Status: Joint

Inflation: 2.0% increasing by 0.02% annually

State and Local Tax Rates:Ordinary Income: 0%Capital Gains: 0%

Retirement: Jan 2021 Management Fees: .8%


Simulation Modeling

78


Asset Class Assumptions

Inv Grade Fixed Income: US Small Cap: US REITs: US Large Cap Value: US Mid Cap:

Mean: 4.75% Mean: 9.75% Mean: 10.86% Mean: 8.73% Mean: 11.83%

Standard Deviation: 2.69%





Yield: 3% Dividend: 2% Dividend: 7% Dividend: 2% Dividend: 2%

Turnover: 75%S-T: 60%L-T: 40%





Municipal Fixed Income: US Small Cap Value: US Large Cap: US Large Cap Growth: Non-US Equity:

Mean: 4.85% Mean: 8.59% Mean: 9.49% Mean: 10.28% Mean: 7.03%

Standard Deviation:4.89%





Yield: 2.5% Dividend: 2% Dividend: 2% Dividend: 2% Dividend: 2%


Turnover: 50%S-L: 60%L-T: 40%





Simulation Modeling

79


Why Does the Annuity Work in All These Cases?

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• Investments provide necessary return

• Annuities provide duration and volatility protection

Because, when teamed with investments, it makes for a winning combination

JourneyGuide Advisor Experience

Your Guide to Working With the Ash JourneyGuideTM Team

Questions? Call 844-4ASHJRN (844-427-4576)Send completed Fact Finder to: [email protected]

We Start With the Fact Finder

We’ll Make Sure We Get it Right…if we have any questions about the Fact Finder, we’ll ask

Once We Have the JourneyGuide results… we’ll review them with you

JourneyGuide™-PatentPending

Genera ngIncome–A erInfla on,A erTax

CurrentAge:65(M) IncomeDate:Nov2015 Balance:$922K Confidence:95%atage95

CurrentStrategy

Alloca ons:

Annuity:0%

FixedIncome:60%Equi es:40%

_________________

$55,000

_________________

$61,000

Alloca ons:

Annuity:24%

FixedIncome:46%Equi es:30%

_________________

$65,000

Alloca ons:

Annuity:35%

FixedIncome:52%Eq(mid-cap):13%

10.9%increase

18.2%increase

RevisedAlloca on

IntroduceAnnui es

IncludingAnnuityIncreasedAnnuity,RevisedAlloca on

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Tell Us What Your Client Thought

You May Be Wondering…

Q: When can I start using JourneyGuide?

A: Plans are to begin February 22

Q: How many can I get?

A: During the pilot run (ending this summer), we can provide one report per month, per advisor

Q: How long does it take?

A: Expectations are five days from submission of Fact Finder to completed report

Q: How much will it cost?

A: During the pilot, there will be no charge ... ultimately, there will be associated costs for JourneyGuide

Documents

JourneyGuide Retirement Optimization - Ash Brokeragesummit.ashbrokerage.com/files/JourneyGuide_Slides.pdf · 2016-02-22 · JourneyGuide™ - Patent Pending My rich uncle… • Gives