Certificate Course in Retirement Income Management Helping retirement professionals convert...
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Transcript of Certificate Course in Retirement Income Management Helping retirement professionals convert...
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.”