2 Transition from accumulation to income 573Types of retirement expensesSources of incomeCLICK to move each letter from the cogs to the left side of the blue box. Need a script to explain. <Welcome / Introductions / Announcements>During our time together today, we’re going to talk about retirement income strategies and how we can move from the important issues of the accumulation phase to the retirement income phase of life.In this discussion we will look at the strategy that can help us in the process.CLICK Three types of retirement expensesCLICK Seven sources of retirement incomeCLICK And if the retirement income is not enough to cover the expenses, five options for helping income cover expenses.Transition from accumulation to incomeOptions for making income cover expenses2
3 Important retirement questions Important retirement questionsWill I have enough to retire when I want to retire?Will I run out of income in retirement?How will inflation affect my retirement income?Moving into retirement can be a scary proposition. There are many “unknowns” that need answering. Among the questions frequently asked are:Will I have enough to retire when I want to retire?Will I run out of income in retirement?And, How will inflation affect my retirement income?3
4 Retirement readiness? Don’t have formal retirement strategies Retirement readiness?Don’t have formal retirement strategiesAssume they have limited options for improving their financial situation once they reach retirementConfused about the complexity of financial issuesLimited knowledge of and/or help in the retirement income strategies processThink retirement is simply the reverse of accumulationWhile most will, at some point in their lives, ask those types of questions, some simply don’t prepare well.Whether at-retirement, in-retirement or preparing for retirement, many of may find that you:Don’t have a formal retirement strategyAre assuming that there are limited (if any) options for improving your financial situation once you reach retirementAre confused about the complexity of financial issues in retirementHave limited knowledge of and/or help in the retirement income strategies processThink that retirement is simply the reverse of accumulationHowever, retirement is not simply the reverse of accumulation and it is critical to realize that retirement takes a whole new way of thinking and a whole new set of strategies.4
5 The retirement income strategy The retirement income strategySo what is a retirement income strategy? Let’s use the simple analogy of oil in your car. If you start your car, and there is no oil in the engine, it will run for awhile. But fairly soon its going to stop. The lack of oil can create expensive problems.Just as oil in your car can help it run a long time, a retirement income strategy is designed to make sure your income doesn’t stop. Retirement only happens once – its important to plan well.
6 Agenda: Re-Engineering Retirement Agenda: Re-Engineering RetirementDifference between accumulation and incomeThe retirement strategy / Case studyNext stepsOILHere is what we’ll be considering as we think about ways to Re-Engineering Retirement:Important difference between accumulation and retirement income? We’ll set the stage by taking a closer look at the challenges of transitioning from “accumulation” to “income”.The retirement strategy? We’ll learn about three levels of retirement expenses, seven sources of retirement income, work through a hypothetical case study, then look at five options for improvement if what you’ve accumulated doesn’t match up with what you believe you’ll need and want during retirement.And finally, I’ll explain What are the next steps so you’ll be ready to put the Re-Engineering Retirement process to work for your benefit.
7 Retirement accumulation stage Thinking differentlyRetirement accumulation stageRetirement AccumulationStageRetirementIncomeStageFinancial ObjectiveHave enough money to retireAsset AllocationPortfolio allocationLets take a closer look at some of the differences between the two distinct stages of retirement, the accumulation stage and the income.[click] In the accumulation stage the objective is to have enough money to retire.[click] We might use a growth-oriented portfolio allocation. Often the more time a person has until retirement, the more “risk” they will take.[click] In the accumulation stage we usually have an idea of when we would like to retire.As you near the end of your accumulation stage, you may wonder about these questions:Time HorizonKnown to retirement7
8 How much money will we need? Will we have enough to get by? Thinking differentlyHow much will we have?How much money will we need?Will we have enough to get by?Will there be enough for extras?Will there be something for our heirs?How much will we have?[click] How much will we need?[click] Will we have enough to get by?[click] Will there be enough for some extras?[click] Will there be something left for our heirs?
9 Retirement income stage Thinking differentlyRetirement income stageRetirement AccumulationStageRetirementIncomeStageFinancial ObjectiveHave enough money to retireNot outlive assetsAsset AllocationPortfolio allocationWithdrawal allocationOnce you retire and enter the income stage you will, most likely:[click] want to make sure you don’t run out of money. You want to make sure the money lasts as long as you do.[click] rethink how you invest your money. In other words, the way you think about risk may change because your situation has changed. If the market’s decline shrinks your retirement account you may not be able to get your old job back.Let me give you an example of a risk we call “sequence of return” risk.Time HorizonKnown to retirement9
10 The “Lost Decade” $12,000 10,000 8,000 6,000 Thinking differently The “Lost Decade”$12,00010,0008,000Total return on a $10,000 investment in the S&P 500 from 1999 through Feb (adjusted for inflation) resulted in the longest funk since 1970 or what has become commonly known as “The Lost Decade”.6,000The Wall Street Journal, March 26, 2008The S&P 500: 1999 through February Total return on $10,000 investment adjusted for inflation. Note: Not possible to invest directly in the index.Standard & Poor’s 500® index (S&P 500®) is comprised of 500 stocks representing major U.S. industrial sectors. “Standard & Poor’s®,” “S&P®,” “S&P 500,” “Standard & Poor’s 500,” and “500” are trademarks of The McGraw-Hill Companies, Inc. and have been licensed for use by Allianz Life Insurance Company of North America. The product is not sponsored, endorsed, sold or promoted by Standard & Poor’s and Standard & Poor’s makes no representation regarding the advisability of purchasing the product.
11 Sequence of returns Bad returns later / sooner 0 5 10 15 20 25 30 Year Thinking differentlySequence of returnsBad returns later/ sooner$3,000,000Hypothetical valueHypothetical value at 0%Year 30: %Year 29: %Year 28: %Year 27: %Year 26: %Year 5: %Year 4: %Year 3: %Year 2: %Year 1: %Year 1: %Year 2: %Year 3: %Year 4: %Year 5: %Year 26: %Year 27: %Year 28: %Year 29: %Year 30: %$500,000Here we have an example of 30 years of investment returns. Sometimes the returns are good and sometimes the returns are not so good. This is what we would expect in the investment world. When we move into retirement and we need the account for income, it becomes very important WHEN the returns are good and WHEN they are not so good.In this example we have a $500,000 account that is giving us $25,000 per year (increasing at 3% per year to help offset inflation) We also see that during this hypothetical 30 year period the returns in the beginning are fairly good and we have some difficult years at the end.[click] If this is the scenerio as I’m withdrawing imcome there will be much more money in my account in the end.[click] If we have the difficult years at the beginning of the period you can see a very different outcome. The money is gone around year 19.So the question here is do you have a strategy to address the “sequence of returns” problem? Some think the answer is to become ultra conservative with their money. While that might feel good initially, low rates may do little to help your savings fight off the affects of inflation.YearThis example is shown for illustrative purposes only and is not intended to predict or project future results. It is not intended to represent any specific product or investment, and does not reflect the deduction of taxes or product fees or expenses.
12 Retirement income stage Thinking differentlyRetirement income stageRetirement AccumulationStageRetirementIncomeStageFinancial ObjectiveHave enough money to retireNot outlive assetsAsset AllocationPortfolio allocationWithdrawal allocationAnd finally, in the income stage we don’t really know how long we’ll need income – we don’t know when we will die.Time HorizonKnown to retirementUnknown to date of death12
13 How can we make the most of my retirement income sources? Thinking differentlyHow can we make the most of my retirement income sources?What should we reposition in consideration of tax and transfer issues?What should we spend first, next, last?What should we hold?In the income phase we ask questions like:How can we make the most of my resources for retirement income?[click] What should we reposition in consideration of tax and transfer issues?[click] What should we spend first, next, last?[click] What should we hold?By the way, one of my favorite financial “tips” is to manage the impact of T.I.P. – T for taxes, I for inflation, and P for procrastination. You’ve already done away with “procrastination” by being here today. We’ll deal with the other two (taxes and inflation) when we start the re-engineering process.
14 Retirement income strategies Thinking differentlyRetirement income strategiesRetirement AccumulationStageRe-Engineering RetirementRetirementIncomeStageNot outlive assetsWithdrawal allocationUnknown to date of deathTransition to:Financial ObjectiveHave enough money to retireMaximize sources of incomeAsset AllocationPortfolio allocationReposition assets to meet needs and goalsRe-engineering Retirement is designed to help make the transition from:[click] having enough money to retire to not outliving your assets.[click] from a “portfolio allocation” to a “withdrawal allocation”.[click] and from a “known time horizon” to an “unknown”Now let’s look at how we might work through the re-engineering, process.Time HorizonKnown to retirementRetirement strategies transition14
15 The StrategyHow does Re-engineering Retirement Strategy actually work?
16 7 5 3 Levels of Retirement Expense Sources of Retirement Income 3-7-5 Strategy375Levels of Retirement ExpenseSources of Retirement IncomeOptionsThe Re-Engineering Retirement Strategy considers three levels of retirement expense and then looks at seven sources of retirement income.If you are like most people who have done a good job in the accumulation stage, Re-Engineering Retirement is a relatively simple process of moving money around so you can position your resources to help meet your goals for the three levels of retirement expenses.But, just in case your projected retirement income doesn’t match your retirement expenses, we’ll offer five options designed to help improve your financial situation.
17 Three levels of retirement expenses 3-7-5 StrategyThree levels of retirement expensesExpensesLegacyFunds remaining for your heirs3DesiredLifestyle “extras”What expenses will you have in retirement? If you’re like most people, the list becomes quite long when you start thinking of everything you need and want. For now, let’s simplify things with three categories of retirement expenses.CLICK. Let’s start with what we’ll call “survival” expenses to cover your most basic needs (food, shelter, healthcare, etc.). That bar is at the bottom because it covers only your basic needs, and your other retirement expenses build on it.CLICK. Next, we move up to what we’ll call “desired” expenses. This category includes the “extras” that you choose to make your life and your lifestyle more enjoyable during retirement. This might include funds for hobbies, recreation, or travel.CLICK. And finally, we consider your financial legacy; funds you’d like to have left for your heirs.These are Re-Engineering Retirement’s three levels of retirement expenses we need and hope to fund. Next, let’s see where the money might come from to meet those income needs.SurvivalExpenses to cover your most basic needs17
18 Seven sources of income for retirement 3-7-5 StrategySeven sources of income for retirementExpensesLegacyDesiredSurvival3Sources of IncomeWelfare - charitySlide automatically animates. The Expenses table will move to the right. The Sources table appears at the left.Here are seven possible sources of retirement income. Again we will work our way from the bottom to the top.CLICK. Social Security is the base. Ever since it was signed into law in 1935, the premise has been that Social Security is a safety net. It has never been intended to fully fund a person’s retirement income. As with any pension plan, the earlier you begin receiving benefits, the lower those benefits will be.And, most retirees can expect to pay income taxes on between 50% and 85% of their Social Security retirement income (Source: Social Security Worksheet in the 1040 Internal Revenue form line 20a and 20b).CLICK. The second source of retirement income is employer sponsored retirement plans (such as 401(k), defined benefit, and SEP plans). We group these together because they have unique characteristics compared to other retirement programs.CLICK. The third source is traditional IRAs. At retirement, employer-sponsored plan participants often roll their plan proceeds into traditional IRAs to take advantage of additional flexibility in taking withdrawals. Of course, most employer-sponsored retirement programs and all traditional IRAs have required minimum withdrawals beginning around age 70½.CLICK. Our fourth source of retirement income is the Roth IRA, which can be funded either from annual contributions or conversions from Traditional IRAs or some employer-sponsored retirement plans. Roth IRAs are one of the last income sources that people tap because of their tax-deferred and tax free nature. In addition, Roth IRAs are about the only retirement program that does not have required minimum distributions.CLICK. The fifth source of income will be your non-qualified assets (including personal investments in mutual funds, CDs, stocks, bonds, investment real estate, etc.)CLICK. The sixth source of income, continued employment, hasn’t traditionally been viewed as a retirement income strategy, but is becoming increasingly common. So – one consideration for some people is to phase into retirement gradually, and possibly delay beginning to receive Social Security retirement income. The monthly benefit increases each month between your full retirement age and age 70.CLICK. The final source of retirement income is one that very few people want to tap into—welfare or charity. Most people agree that it is not appropriate and we try to avoid relying on that source for income.So, to summarize, retirement expenses can be classified as survival, desired, or legacy. And, there are seven key sources of retirement income, including welfare or charity, which none of us hope to ever need.That’s the theory behind re-engineering reality. But how does it work in the real world?Not desirableContinued EmploymentPhase into retirement graduallyNonqualified Assets (NQA)7Mutual funds, CDs, stocks, bondsRoth IRATax deferred / tax freeTraditional IRAERISA contributions and rolloversQualified ERISAEmployer sponsored plansSocial SecurityThe base18
19 Hypothetical story Ken and Patty at retirement 3-7-5 Story 25.03.2017 In order to see how re-engineering might work for you, let’s look at a hypothetical case study with a married couple entering retirement. We’ll call them Ken and Patty.We’ll take a look at what they have accumulated and if it does (or does not) match up with what they need and want for retirement income. Then we’ll look at strategies for moving money around to help ensure their resources meet or exceed their goals.Ken and Patty represent what we might consider the ideal situation, which will make it easier to understand the overall “Re-Engineering Retirement” process.Your personal situation may or may not be similar to this hypothetical case study. Remember – the re-engineering process is useful for a variety of situations including people with assets that exceed their needs and desires and also for people whose assets that fall short. It’s very beneficial to people approaching retirement since more time often means more options. Even so – it can also be useful to people who are already in retirement.In all cases, the purpose of Re-Engineering Retirement is to help ensure that you are positioning your assets to make the most of meeting your needs and desires.Ken and Patty at retirementNote: This example is shown for illustrative purposes only and does not represent actual Allianz clients..19
20 Ken & Patty – age 66 Combined Social Security $2,000 per month 3-7-5 StoryKen & Patty – age 66Combined Social Security$2,000 per monthDefined Benefit (Pension) income$500 per monthHome is mortgage freeZeroIRA (including rollover)$500,000Savings portfolio$400,000Estimated annual retirement expensesSurvival expenses: $36,000 Desired expenses: $20,000Desire to leave a legacyBoth Ken and Patty are age 66, which means that they are eligible for full Social Security retirement benefits. After Social Security deducts their Medicare Part B premiums, their combined monthly checks are $2,000 a month.In addition, Patty’s former employer sends her a $500 monthly check from their defined benefit (Pension) plan.Their home is mortgage free.Their investment assets consist of a $500,000 rollover IRA and a savings portfolio of $400,000.They have estimated their annual survival expenses to be $36,000 a year ($3,000 a month). This includes housing expenses such as utilities, maintenance, and property taxes; Medicare prescription drug coverage, a Medigap policy, and all deductibles and co-pays. They have also included transportation and income taxes in their survival amount.In addition to having their basic needs met, they would also like to be able to do all of the things they enjoy such as golf, entertain, and travel. We have categorized these expenses as “desired expenses” an estimated $20,000 a year (or approximately $1,667 per month).Finally, they think it would be good to have some money left when they die to leave to their family and their favorite charities.Note: This example is shown for illustrative purposes only. All figures are pre-tax estimates.20
21 7 3 Ken & Patty Re-Engineering Retirement Sources of Income Expenses 3-7-5 StoryKen & PattySources of IncomeWelfare – charityNonqualified Assets (NQA)Roth IRATraditional IRAQualified ERISASocial SecurityContinued Employment7Re-Engineering RetirementSurvival$36,000Desired$20,000LegacyExpenses3$400,000NoneLet’s go back to our three retirement expenses and seven sources of retirement income to match with the current needs and desires for Ken and Patty.$500,000$6,000$24,000Note: This example is shown for illustrative purposes only. All figures are pre-tax estimates.21
22 7 3 Ken & Patty Re-Engineering Retirement Sources of Income Expenses 3-7-5 StoryKen & PattySources of IncomeWelfare – charityNQARoth IRATraditional IRAQualified ERISASocial SecurityContinued Employment7Re-Engineering RetirementSurvival$36,000Desired$20,000LegacyExpenses3$280,000 (25 5% return)$6,000$120,000 annuityNoneWe’ll start with Social Security. They estimate that their net Social Security retirement income will be $2,000 a month, or $24,000 a year. We will apply this toward their Survival expenses. Of course, part of the benefit will be taxable, but we included income taxes as part of the Survival expenses. That leaves $12,000 a year that is still needed to satisfy their survival income needs.Patty is receiving $500 a month from her former employer’s defined benefit pension plan. We will add that $6,000 a year to the Social Security benefit, to bring them up to $30,000 of the $36,000 survival need. This gives them income that is guaranteed by the federal government and income that is guaranteed by Patty’s former employerNow, we turn to the third source of guaranteed income—a life insurance company—to finish off their survival need. By converting $120,000 of their non-qualified assets to an annuity paying out 5% per year, they will have their entire $36,000 Survival need provided with guaranteed money.Note: 5% ROR is for illustrative purposes only. Guarantees are backed by the financial strength and claims paying ability of the issuing company.$500,000$6,000Patty’s pension plan$6,000$24,000$24,0005% Rate of return is for illustrative purposes only. Guarantees are backed by the financial strength and claims paying ability of the issuing company.2222
23 Work part-time until age 70 3-7-5 StoryKen & PattySources of IncomeWelfare – charityNQARoth IRATraditional IRAQualified ERISASocial SecurityContinued Employment7Re-Engineering RetirementSurvival$36,000Desired$20,000LegacyExpenses3Work part-time until age 70$280,000 (25 5% return)$6,000$120,000 annuityNoneIf Ken chose to work part time until he reaches age 70—an additional five years—he could fund his desired income amount during that period from his wages. Then at age 70, he could stop working and use the required minimum distribution as “desired” income, supplementing it from the non-qualified assets to meet the desired income amount.$500,000$6,000Patty’s pension plan$6,000$24,000$24,000Note: This example is shown for illustrative purposes only. All figures are pre-tax estimates.2323
24 Work part-time until age 70 3-7-5 StoryKen & PattySources of IncomeWelfare – charityNQARoth IRA From IRATraditional IRA IRA $500,000Qualified ERISASocial SecurityContinued Employment7Re-Engineering RetirementSurvival$36,000Desired$20,000LegacyExpenses3IRA RMD $18,250From nonqualified $1,750Roth IRAWork part-time until age 70$280,000 (25 5% return)$6,000$120,000 annuityAnother option would be to convert the IRA to a Roth IRA and deplete the non-qualified assets over their remaining years. CLICK. And the Roth IRA becomes their ultimate, income-tax-free legacy.And there you have it. Even though it seemed clear that Ken and Patty had enough to retire, some relatively simple “re-engineering” may have helped them to enter retirement with greater confidence that they have the resources to cover the survival expenses, meet their desired expenses, and leave a financial legacy for their heirs.This is just one example of a possible re-engineering strategy. I will review your specific financial situation and goals and develop a strategy that fits your needs and desires.$6,000Patty’s pension plan$6,000$24,000$24,000Note: This example is shown for illustrative purposes only. All figures are pre-tax estimates.2424
25 But what if …? 3-7-5 Strategy 25.03.2017 So, what IF it looks like the assets you’ve accumulated will fall short of what you need and want for retirement income?What if your personal situation is not as “ideal” as the hypothetical case study we just reviewed? If your retirement income sources won’t provide enough income to meet your survival and desired retirement expenses – even with repositioning – then what?
26 5 Options to improve income 3-7-5 Strategy5 Options to improve incomeSources of IncomeWelfare – charityNonqualified AssetsRoth IRATraditional IRACompany retirement programsSocial SecurityContinued Employment7OptionsLower your expectationsSpend less and save more nowDecide to work longer.Take on more investment riskCombination (or all) of above5SurvivalDesiredLegacyExpenses3Then you will need to consider one of these five options for balancing your retirement income and your retirement expenses:Lower your expectations for your standard of living in retirementSpend less and save more now in order to have more when you retireDecide to work longer before you retire or take a part-time jobTake on more investment risk to increase the potential return on your assetsUse a combination of the above optionsLet’s look at these five options and how they might work26
27 $ needed to supplement income 3-7-5 Strategy5 Options at workCurrent standard of livingAggressive %$ now (401(k))Moderate 6 - 8%$ additional (401(k))$ moreConservative 4 - 6%RetirementCombination of all options$ needed to supplement incomeTo apply any of them, we need to do some calculations based on the data we’d collect from your worksheets. Some of the information we need to do our calculation include:First, we need a retirement timeline, the period between now and retirement. For our hypothetical illustration, let’s assume 20 years.Next, we need to know how much you’ve already set aside, and what you are currently putting into your retirement programs.The final number that we need is how much money you will need to maintain the standard of living that you desire in retirement.Then, assuming a reasonable rate of return, we calculate out how much you could have when we are ready to retire, which becomes the goal number at the top of the graph. If your present savings and contributions to retirement plans meet the goal, there is no need for adjustments. If it doesn’t meet the goal – which is often the case – then it’s time to consider one or more of these five options.Settling for less.Saving more now.Working longer.Taking on more risk.Or, combination of all the options.70?AgeTime4565This example is shown for illustrative purposes only and is not intended to predict or project future results. Your actual results will vary. Please note that with the potential for greater returns comes greater risk and volatility.27
28 $ needed to supplement income 3-7-5 Strategy5 Options at workCurrent standard of living$ additional (401(k))$ moreCombination of all optionsModerate 6 - 8%Conservative 4 - 6%$ needed to supplement incomeUsing a combination of the other four options may be most effective because it allows incremental adjustments in several areas, each of which would be less dramatic than the adjustment that would be required for any one single option on its own.So, even if your retirement reality is not quite what you’d hoped for, you may be able to achieve a satisfactory retirement by:Reducing your expected standard of living slightlyIncreasing contributions to retirement programs by a small amountExtending your work period by a year or two, andTaking a little more risk (perhaps from conservative to moderate)AgeTime4565AgeTime6568?This example is shown for illustrative purposes only and is not intended to predict or project future results. Your actual results will vary. Please note that with the potential for greater returns comes greater risk and volatility.28
29 SummaryMany people approaching retirement are worried about their financial security in retirementEvaluate how well your retirement expenses match up with your retirement incomeRe-Engineering Retirement can help you successfully transition from accumulation to incomeOILNow, let’s close with a three point summary and next steps.1. Many people approaching retirement (even some who have accumulated significant assets) are worried about their financial security in retirement.2. Retirement income strategies help identify how well your retirement expenses match up with your retirement income needs3. Re-Engineering Retirement can help you successfully transition from accumulation to income, helping to ensure a more financially secure retirement.
30 What is the next step?OILSo, what is the next step?OIL
31 OIL Next steps? Lets meet for an analysis and recommendations Next steps?Lets meet for an analysis and recommendationsAnalysis and anticipated retirement expenses compared to anticipated retirement incomeRecommendations for positioning resources to help enhance incomeOptions (if needed) designed to compensate for an anticipated shortfall of incomeDo we have PDFs of these?You will have my support in the re-engineering process. Once we meet and go over your individual goals, my support includes:Analysis and recommendationsI will review the information you provide me to determine if you will have adequate income to meet your anticipated retirement expenses. If not, I will develop some suggestions that may be helpful in accomplishing this.After I have reviewed your information, we will schedule a time and meet to review my analysis and recommendations. Then we’ll meet to discuss recommendations for positioning your resources to enhance your income.And, if needed, we’ll discuss options designed to compensate for any anticipated shortfall of income.This analysis is not a comprehensive financial or retirement plan. Planning services are available at additional cost and offered only by appropriately licensed registered investment advisors.31