Certificate Course in

Retirement Income Management

Helping retirement professionals convert retirement assets

into lifetime income

Sponsored by: The National Retirement Planning Coalition (NRPC)

Developed by: The National Association of Variable Annuities (NAVA) and

The International Foundation for Retirement Education (InFRE)

Where Are We Today? On the crest of an enormous change in a

retirement market that includes:• More than $10 trillion in plan assets1

• Current retirees under age 70 with $3.3 trillion in wealth, excluding homes2

• 38% of defined benefit plans allowing retirees to choose a payout other than an annuity3

• Pension portability and proposed legislation that dramatically increases the need for advisor services.

Sources: 1EBRI; 2SRI Consulting Business Intelligence , 2003; 3GAO Report on Private Pensions, July, 2003

The Challenges We Face• Retirement assets must last over a longer period

of time than in the past.

• Retirees need help aggregating and converting assets into a lifetime income stream.

• There is no “one size fits all” solution to retirement income management.

• Employers will demand qualifications.

• Most financial advisors and planners lack the necessary retirement knowledge and expertise.

What Does All This Mean?

• Many retirees might experience a dramatic decline in their standard of living.

• Demand will shift from accumulating assets to converting assets into lifetime retirement income streams.

• Advisors qualified in retirement income management will meet with the greatest success.

What We Need to Do: Apply a Process

Retirement Income Plan

Optimization Process(Lifetime Income)

(Tax Planning)(Retirement Vehicles)

Client Needs

Client Resources Retirement Risks

The Retirement Income Management Process

Even With a Process, It Isn’t Easy!

“One of the most complex economic calculations that most workers will ever undertake is, without doubt, deciding

how much to save for retirement.”– Alan Greenspan, 2002 National Summit on Retirement Savings

Determining the annual amount to consume in retirement is even more

complex.

A Typical Case

Retirement Assets Jim LindaAge 67 64Health average/poor goodPension $24,000/yr none401(k), 457, 403(b) $148,000 $36,000Bank IRA (CDs) $28,000 $5,600Taxable mutual funds $75,000 $0Vacation home $49,000 (1/2) $49,000Def. fixed annuity $25,000 $25,000Long term care ins. None NoneRetiree health insurance None Yes

Workshop Overview

• Purpose: to help you know how to convert retirement assets into an optimized lifetime income stream.

• Goal: to learn a sound process to maximize a retiree’s chance of establishing a sustainable lifestyle from their retirement resources.

“Make sure I don’t run out of money before I run out of life.”

1. Assess retiree needs

2. Identify retirement income resources

3. Manage retirement risks

4. Identify distribution, tax and estate issues and opportunities

5. Convert resources into income

6. Maintain and update the plan

The Retirement Income Management Process

Workshop Agenda—Day 1

• How to assess retiree needs

• How to determine resources available

• How to identify and manage risks faced by retirees

• Explore income and estate tax rules and planning opportunities for distributions

Workshop Agenda—Day 2

• How to identify appropriate withdrawal options to convert savings into income

• How to maintain and update the plan

• Practice case studies

Step 1: Assess Retiree Needs

Lifestyle Stages

• Early retirement – Ages 55 to 70½– Phased retirement, including bridge jobs

• Mid retirement – Ages 70½ to 85– Required minimum distribution (RMD) rules apply– Mandatory annuitization may begin

• Late retirement (85+)

Source: “A Stages Model for Planning Retirement Income Distribution” by Michael Everett and Murray Anthony. Used with permission.

Age 65 and Older:“Working” or “Retired”?

58%23%

19%

Fully retiredWorking & retiredNot retired

Source: “American Perceptions of Aging in the 21st Century,” 2002 update, The National Council on Aging. Used with permission.

Money Stages & Changing Priorities

• Early retirement– Increased spending (“go go”)

• Mid retirement– Slower spending (“slow go”)

• Late retirement– What spending (“no go”)

• Lifestyle spending– Suits to casual wear– World Travel to RVing in Arizona

Emotional Issues

• Deciding when to retire– Health insurance– Social Security– Enough money– Overall health status– Coordinating retirement dates with a spouse– Not everyone retires on January 1st

– Peer actions and attitudes

Reasons to Retire

0

10

20

30

40

50

60

70

80

SocialSecurity

EnoughMoney

CertainAge

DecliningHealth

% Reason

Source: “American Perceptions of Aging in the 21st Century,” 2002 update, The National Council on Aging. Used with permission.

%

What Are You Retiring To?

Are you ready for a month of Saturdays?

“Sooner or later I’m going to die, but I’m not going to retire.”

- Margaret Mead

Retirement Income Needs Analysis

Essential Needs Discretionary Needs

Total Retirement Income Needs

Guaranteed Income Supplemental Income

Social Security

Pensions

Immediate Annuities

Taxable Assets

Personal Retirement Accounts

Wages

Source: Adapted from Cerulli Associates

Expenses for a High-Income Retiree

Food11% Alcohol

1%

Housing27%

Apparel4%Transportation

13%Health Care

7%

Entertainment4%

Personal Insurance

10%

Cash8%

Miscellaneous3%

Taxes12%

Source: Bureau of Labor Statistics Total expenses = $76,592

Expenses for a Middle-Income Retiree

Food13%

Alcohol1%

Housing30%

Apparel3%

Transportation19%

Health Care12%

Entertainment4%

Personal Insurance

6%

Cash6%

Taxes4%

Misc.2%

Source: Bureau of Labor Statistics Total expenses = $41,711

Calculating the Annual Income Need: Two Approaches

• Build the budget based on need “I want to spend X dollars per year for the rest of my

life. How can I do that?”

• Budget based on resources

“I have X dollars of assets and income; how much can I afford to spend each year and not outlive my

income?”

Pitfalls of Money Projections

• Example: client age 60, has $1 million, will earn earn 8% over a life expectancy of 25 years.

Q: How much can he spend per year?A: $86,740 according to the calculator

• What are the problems with this approach?– Dangerous assumptions– Mortality– Pattern of market returns

Carving Out the Income Need

• Segregate the expense amount each year– Annual lump sum– Quarterly or monthly

• Flexibility to adjust annual expense need– Sleep at night money/emergency fund

How the Annual Income Need May Change

• Replacement ratios: rules of thumb– 70-100% of current income– For survivor, 75% of couple retiree

income

• Real income– Set $ amount increased annually for inflation– Set % of assets (e.g. 4%)

Tools for Assessing Retiree Needs

• Data gathering for a retiree

• Key documents checklist– Location of key documents– Questions an advisor should ask

Meet the Goldins

• Ages 72 (Mr.) and 68 (Mrs.) Both in good health

• Expect $20,000 per year in combined Social Security benefits; neither works now

• He receives a $10,000 per year pension• His IRA is worth $600,000; hers is worth

$500,000; their home is worth $700,000• They want an annual income of $95,000

including $57,000 in essential expenses.

Relating to Retirees

• Stereotypical language– Defining “elderly”– Defining “retirement”

• Stereotyping ages

• Counseling skills

• Generational clients

Changing Gears

• Retirees– “Do I have enough to

live on for the rest of my life?”

– “How should my money be invested?”

– “What do I spend first?”

• Advisors– What are all the

factors to consider for income planning?

– How is a retiree’s situation different from a client who is still working?

– What products work for a retiree?

A Lifetime of Learned Behaviors

• May need to change some behaviors at retirement:– From accumulating to spending mindset– Challenging conventional wisdom: “Never spend

your principal”

• Or not– Continuing to save while in retirement– Putting “spenders” on a budget via annuitization

Wants vs. Reality

• What retirees want– Control and flexibility

for their money– Asset allocation

advice for years– Simple,

understandable products and processes

• What the market offers– Products that lock them

into a lifetime decision– Asset allocation advice

for accumulation years– Very complex choices

with multiple options

Source: Diversified Services Group, Inc.

The Retiree’s Perspective

• “I want to spend X dollars per month for the rest of my life.”

• “I have Y dollars saved up.”

• “Tell me how I can get there.”

• “Keep me on track over time.”