1. Retirement Planning Richard Jakotowicz CFA, CFP®
Director of the Financial Planning & Wealth Management Major
Purnell Hall, Room 318 |

2. Total Control Retirement Out Of Your Control Some Control
Asset Allocation, Location, & Dedication
Total Control
Saving vs Spending
Market Returns
Retirement
Out Of Your Control
Employment, Earnings, and Duration
Policy regarding Taxes, Benefits, and Savings
Longevity
Some Control

3. Retirement Plans Are Different Today
403b plans
401k plans
Pension Plans
Source: The BIS and shows how since the 1980’s companies have stopped offering traditional pensions (defined benefit plans – the blue line) and instead started offering retirement accounts such as 401K’s (defined contribution plans – the red line). 

4. We Are Living Longer!
If you’re 65 today, the probability of living to a specific age or beyond

5. Many Individuals Retire Earlier Than They Planned
Expected vs Actual Retirement at 65
Reasons cited for retiring earlier than planned
Source: Employee Benefit Research Institute, Mathew Greenwald & Associates, Inc., 2016 Retirement Confidence Survey.
Data as of March 2016.

6. Misconceptions from the “Old World”
can cause harm to you in the “New World.”
“More Doctors smoke Camels than any other cigarette!”

7. Focusing on investments is not enough You need an income and spending plan!
If there was a missing fact or piece of information that was costing you a significant amount of money now or that could cause a significant problem or cost in your future, when would you want to find out about it?  Today?  5 or 10 years from now?  Never?  If that fact or piece of information was a must know fact, would you agree you would want to know about it prior to making any type of financial decision, especially one that put your money at risk? 
In this class we will discuss ways to identify all the facts necessary to make a sound financial decision that is in your best interest before making that decision.
Many times investors don’t have a process to filter out myths and misconceptions and help them find out the must know, important facts to make logical decisions for their future.  Do you know what questions to ask?  Have you quantified your fees, taxes or risk issues?  Have you made decisions based on myths, misconceptions, opinions or missing facts?
If you find out that there are flaws or missing information in your decision making process you will quickly realize where money is may be falling through the cracks or where the problems are in your current planning, thus helping you make more informed financial decisions.
Knowledge is not power…The application of knowledge is power.

8. Average Spending Patterns By Age Group

9. Understanding Inflation

10. Understanding Inflation & Returns
Your Investment
Return
Your Investments Need To Earn A Higher Return Than Inflation!

11. Older Individuals Experience Higher Rates Of Inflation
Source: BLS, Consumer Price Index, JP Morgan Asset Management, Data represents the annual percentage increase from 1981 through 2016 except for entertainment and education which date back to Personal care products includes tobacco.

12. Where Will Your Income Come From During Retirement

13. Social Security Benefits – Early, FRA, or Delayed
Source: Social Security Administration, JPMAM

14. Breakeven Ages
Source: Social Security Administration, JPMAM

15. Where Will Your Income Come From During Retirement
There are 3 common strategies for creating retirement income:
Systematic Withdrawals
Income Flooring
Bucketing or Goals Based Investing

16. Option 1: Systematic Withdrawals
Sell and Withdrawal a certain percentage of your retirement account each year
4% Withdrawal Rate = $40,000
5% Withdrawal Rate = $50,000

17. Effects Of Withdrawal Rates & Allocations
Years of sustainable withdrawals for a portfolio earning average returns
Projected nominal outcomes, 50th percentile
40/60 Portfolio
4% Withdrawal Rate

18. Systematic Withdrawals
Pros
Cons
The more you’ve saved and invested, and the more you’ve controlled your expenses, the less risk you will incur by taking the small annual withdrawals needed to support your lifestyle, and the more risk you can take with your portfolio and unknown future returns.
If the portfolio isn’t large enough, it may not provide enough cash to support your lifestyle at a “safe” withdrawal rate of 4%, tempting you to withdraw more and deplete the portfolio.
You determine what percentage you could safely withdrawal each year without risk of running out of money.
Even a large portfolio can be depleted by an unlucky sequence of poor returns in the market.
If the market is declining you will need to withdraw considerably less income.

19. Option 2: Create An Income Floor
Requires you to convert part of your 403b into a lifetime annuity to eliminate the risk of outliving your savings.
Discretionary Expenses
- your “Wants”
Annuity
Social Security
403b,
Investments $
Essential Expenses
- your “Needs”
Guaranteed
Income
32) Income Floor and Upside—A Lifetime Plan for Retirement Income
The second strategy starts with your balance sheet and your lifestyle, not your investment portfolio, to determine how much you need to cover your expenses and how best to ensure that you will. This strategy has emerged in the past decade from the academic field of lifecycle finance, savings and investing, and is based on the asset and liability matching method some well-run pension funds use to ensure future pension payments.
During your working career, the income floor/upside strategy looks at your household income potential, your accumulating and future resources, and your future expenses to determine a safe savings rate that will produce enough savings to securely support your projected retirement and other goals. The earlier you can start this process, the more successful you will be in meeting your goals. You allocate your growing savings across a broadly diversified portfolio balanced between stocks (higher-risk) and bonds (lower-risk) based on your balance sheet and goals. The focus is on savings and risk-adjusted growth, not on market moves and total returns, which can lead the unwary astray.
As you approach retirement, the strategy becomes more focused. It starts by identifying your essential annual retirement expenses and your discretionary, aspirational goals for retirement, including legacy wishes. Think of this as listing your needs/wants/wishes.
The strategy then uses a combination of pension, Social Security, and other sources of guaranteed income to cover essential expenses and possibly some level of discretionary expenses. This is your retirement “income floor,” the base you must have to sustain your lifestyle. Whatever you have above the floor goes into an “upside portfolio,” for wants, wishes, and legacy.
Because your income floor is low risk, your retirement income plan is relatively secure, and your remaining upside portfolio can resemble a more conventional investment portfolio, with a balance of stocks and bonds as in the systematic withdrawal strategy, or the medium and long-term buckets of the bucket strategy. Depending on the strength of your balance sheet—the amount of your savings—your upside portfolio may have more or less cushion above the floor and so can afford more or less exposure to market risk. The more cushion you have, the more risk you can afford.
The critical difference between the income floor/upside strategy and the other two strategies is the low risk income floor. The other two approaches do not set-up a risk-free an income floor that will necessarily last as long as you live. Instead, they project a probability that a certain withdrawal rate will not exhaust the portfolio, with some small percentage possibility that it will. The income floor/upside strategy does not leave this to chance.
The kind of low risk floor you need to secure your retirement depends on your balance sheet—whether you are under-funded, “OK” (“constrained”), or well-funded, as we’ve discussed earlier in this series.
If you are under-funded, you cannot afford to expose your savings to market risk—even a small market loss will only make your retirement situation less tenable. Instead, those with limited savings need to trim expenses, consider working longer, and consider purchasing insured income in the form of fixed deferred annuities. These provide guaranteed income utilizing payout factors that are potentially higher than any systematic withdrawal rate commonly considered “safe.”
You can optimize the annuity benefit further by spending some of your savings as cash and laddering CDs or Treasury bonds that mature as cash for the early part of your retirement, and purchasing a fixed deferred annuity that begins paying later in retirement—this provides a higher guaranteed payout than an immediate income annuity and is often called “longevity insurance.”
If your funding is “OK,” meaning constrained, you need to exercise caution and not swing for the fences in the market. As you near retirement, you should be moving away from risk and embracing a strategy that provides a predictable outcome. Instead of holding a classic portfolio of stocks and bonds, you might convert your portfolio to cash and short-term bonds for immediate use, purchase a bond ladder or Treasuries (TIPS or Zeros) for medium term funding, and purchase a fixed deferred annuity for longevity insurance. If your funding is just “OK,”  you may have enough to securely fund your essential expenses and some discretionary spending throughout your retirement, but you may not have enough funds for an upside portfolio exposed to market risk for additional growth.
If you’ve had a good saving habit during your working career and find that you are well-funded, you may have more options both for your income floor and for an upside portfolio. Ideally you would build out a full 30-year bond ladder over the next few years as your income floor, spending each rung for annual expenses the year it matures. By taking a couple years to build the ladder, hopefully you will get some boost from increasing interest rates on the long end of the ladder.
Or you could build out a five or ten-year bond ladder and keep the rest at risk in an upside portfolio, waiting for yields to improve or other options to clarify. This works best if you have a enough cushion that a 20-40% market downturn in the upside portfolio would not cut into any of the funds needed from the portfolio to finish building out the full floor later.
If your upside portfolio is large enough, your income floor can essentially be a systematic withdrawal from the upside portfolio, with your floor being some percentage of the full portfolio earmarked for retirement income funding. Since the floor is not secured, you need to monitor the portfolio carefully and move at least the amount earmarked for the floor to cash or low risk financial vehicles as the markets begin to turn down. This can be risky, especially if your portfolio does not have a sizable cushion, in which case a bond ladder may be a better solution. This is a very different way to manage a portfolio from what you may have done during your working and saving years—you’re trying to protect your income, not score a few extra points in the market. You have more to lose than you stand to gain.
To summarize, the income floor/upside strategy uses the strength of your balance sheet relative to your essential and discretionary annual expenses to build a low risk income floor that will last as long as you live. The income floor is built from a combination of cash and short-term bonds, immediate and fixed deferred annuities, and laddered Treasury and investment grade corporate bonds that matches your current and future expenses. Only once this floor is secured is any additional funding exposed to risk in an upside portfolio designed for long-term growth.
In accountant-speak, you have matched your assets with your liabilities. In real life, your retirement is not at the mercy of the stock market.
The drawback, of course, is that in our current low-yield world, income flooring is expensive, meaning, you need to save more and spend less while still working to make your future income floor stretch 30 years.
Time

20. Option 2: Income Flooring
Pros
Cons
Involves converting a portion of your money to an annuity that secures your essential living expenses.
In the current low interest rate world, annuities are expensive meaning the future payments you will receive will be low.
The success of your retirement is not at the mercy of the market.
An immediate annuity strategy may not provide inheritance.
Tries to protect your income, not score a few extra points in the market.
Flooring:
Pros
Uses the strength of your balance sheet relative to your essential and discretionary annual expenses to build a risk free income floor.
Involves converting a portion of your money to a floor of income that secures your essential lifestyle expenses.
Tries to protect your income, not score a few extra points in the market.
Retirement is not at the mercy of the market.
Cons
In the current low-yield world, income flooring is expensive meaning you need to save more and spend less while still working to make your future income floor stretch 30 years.
An immediate annuity strategy may not provide inheritance.
A bond strategy may not be a prudent strategy in a rising interest rate environment.

21. Option 3: Goals Based Investing
Wants
Needs
Legacy
Stocks
Corporate Bonds
Social Security
Pension
Government Bonds
Cash / Money Market
Real Estate
Alternative Investments

22. Option 3: Bucketing 15+ Year Horizon 5-15 Year Horizon
High Risk
80% Stock
20% Bonds
0-5 Year Horizon
Moderate Risk
50% Stock
50% Bonds
Low Risk
Money Market
High Quality Bond Ladder
Each year a decision must be made to move money from long-term buckets to short-term buckets
The allocations shown above are for illustrative purposes only.
Each investor has a different tolerance for time horizon and risk.

23. How Does A $50,000 Bond Ladder Work
TODAY
1 YEAR LATER
$10,000
5 Year Bonds
$10,000
$10,000
4 Year Bonds
4 Year Bonds
$10,000
$10,000
3 Year Bonds
3 Year Bonds
Bucketing:
Pros
Intuitive and easy to understand.
Asset segmentation makes it easier to withstand the temptation to sell out during a loss at market bottoms.
Retirees may benefit from using a Bucket Strategy to conceptualize retirement income.
You will know how much money you will receive in any given year.
Inheritance to beneficiaries is possible.
Cons
In the current low-yield world, bucketing is expensive in buckets #1 and #2.
In a low-yield world, bucketing is expensive meaning you need to save more and spend less while still working to make your future income floor stretch 30 years.
Bucketing is geared towards high levels of income, not high levels of growth.
$10,000
$10,000
2 Year Bonds
2 Year Bonds
$10,000
$10,000
1 Year Bonds
1 Year Bonds
Cash
$10,000

24. Option 3: Bucketing Pros Cons
Intuitive and easy to understand. Retirees may benefit from using a Bucket Strategy to conceptualize retirement income.
In the current low-yield world, bucketing is expensive in buckets #1 and #2.
Asset dedication makes it easier to withstand the temptation to sell out during a loss at market bottoms.
Requires a “rule” for moving money between buckets
You will know how much money you will receive in any given year.
Bucketing is geared towards high levels of income, not high levels of growth.
Inheritance to beneficiaries is possible.
Bucketing:
Pros
Intuitive and easy to understand.
Asset segmentation makes it easier to withstand the temptation to sell out during a loss at market bottoms.
Retirees may benefit from using a Bucket Strategy to conceptualize retirement income.
You will know how much money you will receive in any given year.
Inheritance to beneficiaries is possible.
Cons
In the current low-yield world, bucketing is expensive in buckets #1 and #2.
In a low-yield world, bucketing is expensive meaning you need to save more and spend less while still working to make your future income floor stretch 30 years.
Bucketing is geared towards high levels of income, not high levels of growth.

25. Sequence Of Return Risk

26. Year S&P 500 Performance 2000 -10.14 2001 -13.04 2002 -23.37 2003
26.38
2004
8.99
2005
3.00
2006
13.62
2007
3.53
2008
-38.49
2009
23.45
2010
12.78
2011
0.00
2012
13.41
2013
29.60
2014
11.39
Sequence Risk is the risk that you experience large negative returns during the early years of your retirement.
Above you will see a chart that goes over the S&P 500 returns. This chart shows returns from
The total annual returns shown above do not reflect any dividends paid or any stock spinoffs from original stock. Past performance is no guarantee of return or future performance.
©2017 Emerging Advisor, LLC

27. Cumulative Principal Of Mathematics
The above chart illustrates the Commutative Principal of Mathematics. In mathematics a binary operation is commutative, if changing the order of the operands does not change the result.
What does this mean in reference to the chart above?
As you can see, the end of the year value in 2014 is exactly the same, $700,567 if you simple reverse the order of the annual returns.

28. Same Returns BUT An Annual $20,000 Withdrawal
The above chart illustrates the Commutative Principal of Mathematics. In mathematics a binary operation is commutative, if changing the order of the operands does not change the result.
What does this mean in reference to the chart above?
As you can see, the end of the year value in 2014 is exactly the same, $700,567 if you simple reverse the order of the annual returns.
Withdrawal occurs at beginning of the year and is adjusted for 3% inflation

29. Two Brothers Two (Different) Retirements
$500,000 each (IRA) at retirement
Both will use $30,000 annually for income
Steve retires in 1990
Bill retires in 2000
The result?
To illustrate the importance of sequence of returns, take for example this scenario.
We have 2 brothers who each retire with a $500,000 IRA
One is retiring in 1990
The other in 2000
They plan to take $30k a year from the IRA for living expenses.
Based on market returns in the 90’s versus the 2000’s, their remaining IRA balances are very different. What is the result?

30. Two Brothers Two (Different) Retirements
Bill Retired in 2000
Steve Retired in 1990
Year
Return WD
Balance
1990
-4.34%
$ ,000
$ ,602
1991
20.32%
$ ,865
1992
4.17%
$ ,667
1993
13.72%
$ ,419
1994
2.14%
$ ,085
1995
33.45%
$ ,340
1996
26.01%
$ ,829
1997
22.64%
$ ,873
1998
16.10%
$ 1,015,728
1999
25.22%
$ 1,234,328
Year
Return WD
Balance
2000
-6.18%
$ ,000
$ ,954
2001
-7.10%
$ ,776
2002
-16.76%
$ ,819
2003
25.32%
$ ,364
2004
3.15%
$ ,794
2005
-0.61%
$ ,094
2006
16.29%
$ ,345
2007
6.43%
$ ,892
2008
-33.84%
$ ,359
2009
18.82%
$ ,081
Disclaimer: This hypothetical example is for illustrative purposes only, and should not be deemed a representation of past or future results, and is no guarantee of return or future performance. This example does not represent any specific product and/or service. Source: Forecastchart.com – The Dow Jones Industrial Average is an index of 30 large, publicly traded companies based in the United States. Investors cannot invest directly in an index. Dividends are not included.
If you look at the final number of data, you’ll see Steve has over $1.2 million in his IRA, while Bill has only $156k.
The difference is all because of the sequence of returns.
Steve will be able to continue comfortably receiving $30k annually for income
Bill will have to be more careful with his withdrawals as his asset balance has decreased substantially
This stresses the importance of guaranteed lifetime income.
Returns represent the performance of the Dow Jones Industrial Average

31. Sequence of Return Risk (retire at year 30)
McLean Asset Management Corporation, 2016 Wade Pfau, Ph.D., CFA

32. Last But Not Least TAXES!
If there was a missing fact or piece of information that was costing you a significant amount of money now or that could cause a significant problem or cost in your future, when would you want to find out about it?  Today?  5 or 10 years from now?  Never?  If that fact or piece of information was a must know fact, would you agree you would want to know about it prior to making any type of financial decision, especially one that put your money at risk? 
In this class we will discuss ways to identify all the facts necessary to make a sound financial decision that is in your best interest before making that decision.
Many times investors don’t have a process to filter out myths and misconceptions and help them find out the must know, important facts to make logical decisions for their future.  Do you know what questions to ask?  Have you quantified your fees, taxes or risk issues?  Have you made decisions based on myths, misconceptions, opinions or missing facts?
If you find out that there are flaws or missing information in your decision making process you will quickly realize where money is may be falling through the cracks or where the problems are in your current planning, thus helping you make more informed financial decisions.
Knowledge is not power…The application of knowledge is power.

33. Your 403B Is Not ALL Yours When you withdrawal money from your 403b,
you must pay Federal and State (exceptions!) Income Taxes.

34. 4% Withdrawal Rate Is Not 4%
When you withdrawal money 4% from your 403b,
you don’t get 4%

35. Understanding Taxes
403b, 401k, IRA --- Withdrawals Are Taxed As Income
59 ½ AGE 70 ½
Withdrawals Allowed
Withdrawals Required
59 ½ AGE
ROTH 403b, ROTH 401k, ROTH IRA --- Withdrawals Are Tax Free
Withdrawals Allowed

36. Each State Taxes Retirement Income Differently

37. Total Control Retirement Out Of Your Control Some Control
Asset Allocation, Location, & Dedication
Total Control
Saving vs Spending
Market Returns
Retirement
Out Of Your Control
Employment, Earnings, and Duration
Policy regarding Taxes, Benefits, and Savings
Longevity
Some Control