Retirement Distribution Planning - Coming Soonmacpamedia.org/.../downloads/2010PFP/Retirement_Di… · · 2015-02-04Retirement Distribution Planning – Jim Otar Fall 2010

Retirement Distribution Planning – Jim Otar Fall 2010

Copyright 2010 Retirementoptimizer.com Inc. 1

Retirement Distribution Planning:

Strategies for

Lifelong Income

Jim C. OtarCFP, CMT, M.Eng.

Retirementoptimizer.com

Outline

• Market History and Retirement Planning

• Time Value of Fluctuations

• Mathematics of Loss

• Two Warning Signals

• Eight Deadly Sins

• The Zone Strategy

• Case Studies

Retirementoptimizer.com 2

Standard Retirement Plan

• Retiring now at age 65

• Age of death 95

• Start with $1 million

• Withdrawal $50,000 / year (IWR = 5%)

• Inflation: 3% per year

• Growth Rate: 8% per year

A 30-year FORECAST!





GREAT!I will have sufficient

money for retirement AND leave and leave

estate …


2% inflation



Real Life Retirement Plan

• Retiring now at age 65

• Age of death 95

• Start with $1 million

• Withdrawal $50,000 / year (IWR: 5%)

• Inflation: 3 %

• Growth Rate: 8% Actual

Actual




The Reality - Story of Three Generations

• Using actual market history, let’s look at portfolios for three generations.

• We will not make a forecast (no assumed growth rate and no assumed inflation).

• We will make an aftcast. Aftcast means looking at historical outcomes as they would have happened in the past.


Data Source: Dow Jones & Company

10

100

1,000

10,000

100,000

1900 1920 1940 1960 1980 2000 2020

DJ

IA

A Look at 110 years of DJIA

Grandfather retires in 1929

Son retires in 1966

Grandson retires in 2000


1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 200

5000

10000

15000

5000

10000

15000

DJI, CDNSTRAIL-B

1929

Wow!Nice Bull Market!

Good Time to Retire!

Retire in 1929




Retire in 1929

1/1/1929

8% Growth3% Inflation


Retire in 1929

1/1/1930

Equity index: DJIA, historical total return less 2% portfolio and management costs


Retire in 1929

1/1/1931





Retire in 1929

1/1/1933




10

100

1,000

10,000

100,000

1900 1920 1940 1960 1980 2000 2020

DJ

IA

1933 - 1936

300%

Retire in 1929


Retire in 1929

1933 - 1936






10

100

1,000

10,000

100,000

1900 1920 1940 1960 1980 2000 2020

DJ

IA

1929Retire

1959Dead

1941Broke

Retire in 1929


1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 200

5000

10000

15000

5000

10000

15000

DJI, CDNSTRAIL-B


Good Time to Retire!

1966

Retire in 1966


Retire in 1966

1/1/1966





Retire in 1966

1/1/1966

1/1/1981



Retire in 1966


10

100

1,000

10,000

100,000

1900 1920 1940 1960 1980 2000 2020

DJ

IA

1966Retire

1981Broke

1996Dead



10

100

1,000

10,000

100,000

1900 1920 1940 1960 1980 2000 2020

DJI

A


Good Time to Retire?

Will history repeat itself?

Retire in 2000




Retire in 2000

1/1/2000



$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

65 70 75 80 85 90 95

Age

Por

tfolio

Va

lue

Retire in 2000

1/1/2010



$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

65 70 75 80 85 90 95

Age

Po

rtfo

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Retire in 2000

1/1/2016





The Reality - Story of Three Generations

Each retired at age 65 and took out 5% initial withdrawal rate.

• The grandfather retired in 1929.

He ran out of money at age 77.

• The son retired in 1966.

He ran out of money at age 80.

• The grandson retired in 2000.

He will likely run out of money by age 81.


Retire in Any Year Since 1900, DJIA

48% failure



Retire in Any Year Since 1900, S&P500

Equity index: S&P500, historical total return less 2% portfolio and management costs

43% failure




Retire in Any Year Since 1900: Balanced 40/60 S&P500 / FI

38% failure

Equity index: S&P500, historical total return less 2% portfolio and management costs. Fixed Income: Historical 6-month CD yield plus 1%.


Retire in Any Year Since 1900: 100% Fixed Income

40% failure

Fixed Income: Historical 6-month CD yield plus 1%.


Market Trends are the second most important factor for portfolio longevity, second only to the withdrawal rate

Market Trends




Markets are made up of SECULAR TRENDS

Secular Market Trends



10

100

1,000

10,000

100,000

1900 1920 1940 1960 1980 2000 2020

DJ

IA

31


10

100

1,000

10,000

100,000

1900 1920 1940 1960 1980 2000 2020

DJ

IA

Cyclical Market Trends: Building Blocks of Secular Trends

32

CYCLICAL


• TVF is the combined losses in a distribution portfolio due to factors beyond our control. They are the “friction losses” of a distribution portfolio.

• If you ignore the TVF then MOST asset value projections in retirement plans will FAIL.

The Time Value of Fluctuations




Sequence of Returns

Reverse Dollar Cost Averaging

Inflation Waves

Secular Trends = The Luck Factor

Cyclical Trends

Random Fluctuations

Contributors of Time Value of Fluctuations


10

100

1,000

10,000

100,000

190

0

191

0

192

0

193

0

194

0

195

0

196

0

197

0

198

0

199

0

200

0

DJI

A

10.0

20.0

30.0

40.0

1900

1910

1920

1930

1940

1950

1960

1970

1980

1990

2000

Por

tfol

io L

ife,

yrs

Luck is the only variable!

Secular Trends: The Luck Factor

Equity index: 40% DJIA / 60% FI, Initial Withdrawal Rate 6%


Inflation




1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 200

5000

10000

15000

5000

10000

15000

Inflation

Growth

4.3%

4.2%

-1.2%

16.4%

4.5%

3.2%

1.7%

11.5%

6.9%

1.9%

3.3%

15.9%

-6.3%

-31.7%

Sideways 3.2% 5.2%

Bull 14.3% 1.8%

Bear -31.7% -6.3%

Inflation


• Inflation creates an increased income demand for the remainder of a retiree’s life

• Worst in secular sideways markets, best in secular bull markets.

• Equities do NOT provide an inflation hedge in secular sideways trends.

Inflation


Reverse Dollar-Cost Averaging

• Reverse Dollar-Cost Averaging means withdrawing a fixed dollar amount on a periodic basis from your investments.

• In each bear market, more shares must be sold to provide income; a permanent loss

• Taking out money from equities or other volatile investments on a periodic basis can reduce the portfolio life by 20%, based on market history.




Remedies:

• In the distribution phase (during retirement), take out the periodic income only from the non-volatile investments – money market, cash balance, etc.

• In the fixed income portion of your portfolio: Keep two year’s of income in money market/cash, and keep three years of income in short term bonds.

Reverse Dollar-Cost Averaging


Determinants of Success in Distribution Portfolios

4% 6% 8%Initial Withdrawal Rate

Equity proxy: S&P500

Sequence of Returns 21% 21% 28%

Inflation 13% 20% 25%

Asset Selection 16% 18% 16%

Portfolio Costs 21% 16% 14%

Asset Allocation 17% 14% 10%

Others 12% 11% 7%


The mathematics of loss in a distribution portfolio works entirely different from an accumulation portfolio.

Mathematics of Loss

42Retirementoptimizer.com



Accumulation Portfolios

• If you had paid $10 per share last week and it is now $8, you lost $2.

• The loss is 20% of the original share price of $10.

• To break-even, you need to make $2, which is 25% of the current share price of $8.


Distribution Portfolios

• Each time you make a withdrawal after a loss, you create a permanent loss in the portfolio.

• Subsequently, you need to recover from the initial losses, as well as from these permanent losses.

• Recovery in a distribution portfolio is a lot harder –if not impossible- than in an accumulation portfolio.


In a Distribution Portfolio, the Loss is Permanent

Retire in 1929:1933 – 1936:

The best cyclical bullish trend of 20th

century – up 300%

Retirementoptimizer.comEquity index: DJIA, historical total return less 2% portfolio and management costs

45



$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

65 70 75 80 85 90 95

Age

Po

rtfo

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Retire in 2000:2003-2007

The first cyclical bullish trend of

21st century



46

% Gain Required

Initial Withdrawal Rate

0% 4% 8%

% Loss

10%

20%

30%

50%

11%

25%

43%

100%

% Gain Required over 3 years

26%

42%

63%

132%

41%

60%

86%

169%

Gain Required to Break Even



Probability of Permanent Loss

Historically, if there are no withdrawals at all, a balanced portfolio recovered from worst losses

in eight years.

40% S&P500, 60% Fixed Income

48





However, when there is even a smallest periodic withdrawal, a full recovery might never happen. At 3% IWR, historically, there was about 20%

chance of never recovering. 40% S&P500, 60% Fixed Income

49



At the other extreme, when the IWR is 8%, by the 11th year, regardless of how strong of a

secular bullish market might be prevailing, the probability of a lower portfolio value is 100%.40% S&P500, 60% Fixed Income

50

Market versus Portfolio Behavior

When the withdrawal rate is over 4%, the chances are, a distribution portfolio will never

increase in value during bullish trends.

MARKETAccumulation PORTFOLIO

DOWN DOWN

SIDEWAYS SIDEWAYS

UP UP

Distribution PORTFOLIO

DOWN

DOWN

SIDEWAYS




Mathematics of Loss - Distribution

• In the distribution stage: Sequence of Returns is most important. Volatility of Returns is not important.

• The concept of the “long-term” does not exist in distribution portfolios, because a longer time horizon has no effect on sequence of returns.

• One unlucky month at the start of retirement can chop the portfolio life by 10 years.


$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

65 70 75 80 85 90 95

Age

Por

tfolio

Val

ue

Retire in 2000:you need 27.2%

annual growth for the rest of your life!



53

$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

65 70 75 80 85 90 95

Age

Po

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Retire in 2000:you need 25.5%

annual growth for the rest of your life!



54



Psychology of Loss

• The Mathematics of Loss shows how the markets works against your investments.

• The Psychology of Loss shows how your behavior works against your investments.

• Combination of both is lethal to the longevity of a retirement portfolio.


Buy and Hold: $1000 grows to $157,809 over 1317 months

CAR: 4.7% (index only)


Miss the Best 39 months (3%): $1000 remains $1,000

CAR: 0% (index only)




Miss the Worst 39 months (3%): $1000 grows to $88,269,752

CAR: 10.9% (index only)


Investment Outcomes

Make a little $

Lose a little $

Make a lot $$Lose a lot $$$

Favorite Topics: Retirement• Income Adequacy

• Reverse Mortgages• Renting your home

Favorite Topics: Estate• Charitable Giving

• Foundations• Wealth Transfer


Psychology of Loss

• DALBAR’s study shows that while the S&P 500 has returned 8.35% over a 20 year period ending in 2008, the average equity investor earned just 1.87%.

• While a market index can have a statistically average return, the averagereturn of investments of an averageinvestor is the bottom decile (unlucky) of that same market index.




Retirementoptimizer.com61

How do you know when you might be running out of luck?

Two Warning Signals


0

5

10

15

20

25

30

35

40

1880 1900 1920 1940 1960 1980 2000 2020

Retirement Year

Por

tfol

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at 6

% I

WR

0%

2%

4%

6%

8%

10%

12%

14%

16%

Earn

ings

Yie

ld

Portfolio Life Earnings Yield

Warning Signal # 1: The PE Ratio

63Retirementoptimizer.comRetirementoptimizer.com



Take the Average Market PE for the last 4 years, then estimate the portfolio life:

• Portfolio Life @6% IWR= 4 + (250 / PE)

• Portfolio Life @5% IWR= 4 + (360 / PE)



64

Check your Luck Factor:

When? At the start of retirement

Generally, if the market average PE is above 12, it is unlikely that you’ll have lifelong income.



65

Check your Luck Factor:

When? On the 4th anniversary of retirement

How? Ask: “Do I have now more money or less money in my portfolio compared to four years ago?”


Warning Signal # 2: Fourth Year Check-up

66



$0

$500,000

$1,000,000

$1,500,000

$2,000,000

0 5 10 15 20 25 30

Years after Retirement

Portfo

lio V

alue



67

$0

$500,000

$1,000,000

$1,500,000

$2,000,000

0 5 10 15 20 25 30


Port

folio

Val

ue

00



68

5% 0% 7%

6% 2% 38%

8% 6% 72%

If Portfolio Value is Higher

If Portfolio Value is Lower

Probability of DepletionAfter 20 years

Initial Withdrawal Rate


40/60 DJIA/ FI




• If a retirement portfolio loses money in the early years and does not recover within 3 or 4 years, then it is highly likely that it will expire before its owner does.

• Don’t lose, give away or donate money in the first 4 years!



$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

65 70 75 80 85 90 95

Age

Po

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Warning Signals - Retire in 2000

1/1/2016



What do you do when you see a warning signal?

Think of Life Annuities!

Warning Signals




• Myths

• Misconceptions

• Untruths

8 Deadly Sins


“You need to take higher risk for higher returns”

In distribution portfolios, higher risk means lower return or shorter portfolio Life

in 80% - 85% of the time.

Deadly Sin #1: Take Higher Risk


Medium Risk: 40% S&P500 / 60% FI

Equity index: S&P500, historical total return less 2% portfolio and management costs. Fixed Income: Historical 6-month CD yield plus 1%. Retirementoptimizer.com 75



Equity index: S&P500, historical total return less 2% portfolio and management costs


High Risk: 100% S&P500

76

“You are 65 now. Your average life expectancy is 20 years.”

“So, let’s design a retirement plan until age 85.”

Average life expectancy gives the age by which 50% of clients, who are 65 now, are dead. If you don’t want half of your clients run out of money, design for age survival

rate of 15% or less.

Deadly Sin #2: Average Life Expectancy


Plan for age of death of 95!

77

“Asset allocation contributes to over 90% of the difference in returns.” (Brinson Study)”

“Therefore asset allocation will solve my retirement problem!”

Once the withdrawal rate exceeds 4%, asset allocation has LITTLE effect on the outcome

Deadly Sin #3: Brinson Study




What are the flaws of applying Brinson study to individual accounts?

• Short data history used - ignores the secular trends, i.e. the luck factor

• Pension funds are an “open” system, individual retirement investments are “closed” – ignores RDCA

• Ignores the inflation effect


Deadly Sin #3: Brinson Study

79

Brinson Study Time Coverage

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1,000

10,000

100,000

1900

1910

1920

1930

1940

1950

1960

1970

1980

1990

2000

DJI

A


100% S&P500

43% failure

Alpha=1.5% Retirementoptimizer.com100% S&P500, 0% Fixed Income, 5% IWR

81




36% failure

Alpha=1.5%, FI: 6-month CD+0.5%Retirementoptimizer.com70% S&P500, 30% Fixed Income, 5% IWR

82

38% failure



83

39% failure



84



100% Fixed Income

40% failure


85

“Diversification prevents losses”

Diversification has little effect in distribution portfolios if you are unlucky.

Deadly Sin #4: Over-Diversification


$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

$3,500,000

$4,000,000

65 70 75 80 85 90 95

Age

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Retirementoptimizer.com40% S&P500, 60% Fixed Income, 6% IWR

87



$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

$3,500,000

$4,000,000

65 70 75 80 85 90 95

Age

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40% Nikkei225, 60% Fixed Income

Retirementoptimizer.com40% Nikkei225, 60% Fixed Income, 6% IWR

88

$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

$3,500,000

$4,000,000

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40% FTSE, 60% Fixed Income

Retirementoptimizer.com40% FTSE, 60% Fixed Income, 6% IWR

89

$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

$3,500,000

$4,000,000

65 70 75 80 85 90 95

Age

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40% SP/TSX, 60% Fixed Income

Retirementoptimizer.com40% SP/TSX, 60% Fixed Income, 6% IWR

90



“I will take out only the growth of the portfolio”

What about years with no growth? Where is the money coming from?

Deadly Sin #5


Deadly Sin #5

Maximum taken: Growth of the Portfolio or $60,000, whichever

is smaller


Deadly Sin #5




“I can take out a constant percentage of my portfolio”

Constant percentage will not provide a constant purchasing power.

Deadly Sin #6


Deadly Sin #6

Maximum taken: 6% of the Portfolio Value or $60,000,

whichever is smaller


Deadly Sin #6




“Higher dividends create a large part of the retirement income”

In distribution portfolios, dividends do not matter much for unlucky outcomes.

Deadly Sin #7


Dividends: Retire in 1966 6% IWR, All equity

$0

$500,000

$1,000,000

$1,500,000

$2,000,000

0 5 10 15 20 25 30


Por

tfol

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Historic Dividend 2% Dividend

Index only


Dividends

• Withdrawals during retirement diminishes or eliminates the compounding effect of dividends

• Unless you are lucky, the time value of dividends is not significant.

• Dividends alone do not turn a failing portfolio into a successful one, except in very few marginal cases.

• In spite of that, I like dividend paying stocks in a retirement portfolio.




“Monte Carlo Simulators can accurately forecast the probability of success.”

Incorrect, Monte Carlo simulators are man-made models based on certain

assumptions. Their outcomes are generally too optimistic.

Deadly Sin #8


Monte Carlo simulations assume random fluctuations around an “average” growth

rate

Monte Carlo Simulators


generate random outcomes around the straight line, ignore trend discontinuities. They cannot simulate the Sequence of Returns

• Markets are random in the short term

• Markets are cyclical in the mid term

• Markets are trending in the long term



102



1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 200

5000

10000

15000

5000

10000

15000

Trend Discontinuities


103


cannot simulate Sequence of Events

• In real life, there is a very specific sequence of events.

• All events are correlated.

104

Sequence of Events in Market Cycles

Peak Peak

Contraction Expansion

Trough

StocksBondsInterestInflation

105



Create a “Personal Pension”

using Guaranteed Income

to cover the Basic Expenses

Luck Factor

The Math Of Loss

Warning Signals


Prerequisite for Retirement

A retiree needs two things for a happy and fulfilling retirement:

• Sufficient Emotional Capacity, and

• Sufficient Financial Capacity


Emotional Capacity for Retirement

• In the context of retirement finance, the emotional capacity refers to how you react to market events.

• Choices about asset and income allocation, investment types, annuities and many other decisions depend on this emotional capacity.

• It is a very important aspect of planning.




Financial Capacity for Retirement

If you do not have sufficient financial capacity, no amount of emotional capacity will improve the outcome.

You can be as aggressive as you want with your investments, you might be able to take any market downturn in stride, and you might have been very successful in your own business decisions. It does not matter.

The emotional capacity always plays second fiddle to financial capacity.


The Zone Strategy measures the financial capacity of the retiree and provides a framework to base your strategy for lifelong income

Purpose of Zone Strategy:

For your client: Provide lifelong income

For you: Manage your business

Use your time more efficiently

Attract and keep profitable prospects

Avoid future problems, litigation

Zone Strategy


STEP 2: How much can the market give you?

SWR - Sustainable Withdrawal Rate

STEP 3: How much does an annuity pay you?

AR - Annuity Rate

STEP 1: How much money do you want?

WR - Withdrawal Rate

Zone Strategy:




Retirement Time Horizon

SWR

40 years 3.0%

30 years 3.6%

20 years 5.1%

STEP 2: How Much Can the Market Pay?

Sustainable Withdrawal Rate (SWR)


Sustainable Withdrawal Rate (SWR)

Say, you have $1 million, retiring at age 65, then SWR 3.6% of $1 million is:

SWR = $36,000

indexed to inflation for the rest of your life.

STEP 2: How Much Can the Market Pay?


Say, you have $1 million, retiring at age 65

You want a guaranteed income:• Fully indexed to CPI• Jointly for husband and wife • Payments to continue for a minimum of 10

years, even if both spouses die next month • A 30%-pay cut upon the death of first spouse

AR= $49,000 / year

STEP 3: How Much Does the Insurance Company Pay?




The Zone Strategy

SWR: $36,000

AR: $49,000

ABUNDANT

SUFFICIENT

INSUFFICIENT

0%

WR: $55,000

WR: $40,000

WR: $30,000


Zone Strategy: What is the Primary Risk?

Sequence of Returns

(time is your enemy)

Volatility of Returns

(time is your friend)


Zone Strategy: Export or Retain Risk?

MUST EXPORT RISK

CAN RETAIN RISK




Zone Strategy: Sell Fear or Hope?

Sell FEAR

(of running out of money)

Sell HOPE

(of leaving an estate)


Accumulation

Decumulation

Either, depends on luck

Zone Strategy: Is it Accumulation or Decumulation?


• Investment Planning• Tax Planning• Estate Planning

• Cash Flow Planning• Retirement Planning • Risk Planning

Zone Strategy: Planning Focus




ABUNDANT

Copyright © 2000-2009 Retirementoptimizer.com Inc.

SUFFICIENT

INSUFFICIENT

Investment Portfolio

x 21

x 30

Guaranteed Income

Zone Strategy: Decision Zones for Lifelong Income


Couple, each spouse 65, expect to live 30 years. They need $60,000/year, savings $1,700,000

STEP 1: How much do you want?

• WR = $60,000

STEP 2: Sustainable Withdrawal Rate:

• From table: SWR = 3.6%, $61,200

STEP 3: Annuity Rate:

• From annuity quote: AR = $83,300

Example A: Abundant Savings


SWR: $61,200

AR: $83,300

ABUNDANT

0%

WR: $60,000

Example A:Retirement Savings Gauge




$0

$2,000,000

$4,000,000

$6,000,000

$8,000,000

65 70 75 80 85 90 95Age

Po

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8% Growth

Example A: Abundant Savings


$0

$1,000,000

$2,000,000

$3,000,000

$4,000,000

$5,000,000

$6,000,000

$7,000,000

$8,000,000

65 70 75 80 85 90 95

Age

Po

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Lucky

Median

Unlucky

8% Grow th

Example A: Abundant Savings Investment Portfolio



• WR = $60,000


• From table: SWR = 3.6%, $36,000



Example B: Insufficient Savings





SWR: $36,000

AR: $49,000INSUFFICIENT

0%

WR: $60,000

Example B: Retirement Savings Gauge


$0

$1,000,000

$2,000,000

65 70 75 80 85 90 95Age

Po

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8% Growth

Example B: Insufficient Savings


Example B: Insufficient SavingsInvestment Portfolio

$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

$1,400,000

$1,600,000

$1,800,000

$2,000,000

65 70 75 80 85 90 95

Age

Po

rtfo

lio

Val

ue

Lucky

Median

Unlucky

8% Grow th

82% failure




Insufficient Savings- Solutions

Potential Solutions:

• Delay retirement age

• Get a part time job

• Reduce expenses

GUARANTEED INCOME ONLY!



• WR = $55,000


• From table: SWR = 3.6%, $46,800



Example C: Sufficient Savings Investments + Life Annuity



SWR: $46,800

AR: $63,700

SUFFICIENT

0%

WR: $55,000

Example C: Retirement Savings Gauge




$0

$1,000,000

$2,000,000

$3,000,000

$4,000,000

65 70 75 80 85 90 95Age

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8% Growth

Example C: Sufficient Savings


$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

$3,500,000

$4,000,000

65 70 75 80 85 90 95

Age

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Lucky

Median

Unlucky

8% Grow th

Example C: Sufficient SavingsInvestment Portfolio

36% failureRetirementoptimizer.com 134

If you choose a Life Annuity:

• Calculate how much annuity you need using the “Perfect Mix” formula:

%Annuity = (WR – SWR) = ($55,000 – $46,800)

(AR – SWR) ($63,700 – 46,800)

= 49%

Annuity Required = 49% of $1,300,000

=$637,000

Example C: Sufficient Savings + Life Annuity




$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

$3,500,000

$4,000,000

65 70 75 80 85 90 95

Age

Po

rtfo

lio V

alu

e

Lucky

Median

Unlucky

8% Grow th

Example C: Sufficient Savings -Perfect Mix of Investments + Life Annuity

5% failureRetirementoptimizer.com 136

Summary

• The most important decision in retirement planning is not the asset mix, not what stocks or mutual funds to buy, not the choice of small cap/large cap, domestic/foreign, emerging/developing.

• The most important decision is to figure out if you have the financial capacity to generate retirement income from investments.

• The dividing line between HOPE and FEAR is 3.6%.


&Questions

Answers&QuestionsQuestions

AnswersAnswers

Jim C. OtarRetirementoptimizer.com

[email protected]

Case Study - August 2010: Bob is 65 years of age, just retired. He expects to live until age 95.

His portfolio is valued currently at $600,000 in a 80/20 asset mix (equity/fixed income).

He needs a total income of $50,000 annually. He receives $15,000/year in government benefits. He also receives $8,000 from a pension (no increase in pay).

All figures are in current dollars.

Questions:

1. Based on market history, do you think his savings will last until he is 95?

2. What is his optimum asset mix?

3. How can you secure lifelong income for Bob?

Would a life annuity help? Would a GMWB help?

4. Would renting his basement can help (needs to spend $20,000 in renovations for a rental income of $9,000 / year?

5. His mortgage-free home is worth $350,000. His current housing expenses are $12,000/ year. If he were to move to a rental, his housing costs would be $26,000. If he does not want to rent out his basement, when would he be forced to sell his home?

Documents

Retirement Distribution Planning - Coming Soonmacpamedia.org/.../downloads/2010PFP/Retirement_Di… · · 2015-02-04Retirement Distribution Planning – Jim Otar Fall 2010