Retirement Income
- 1. Retirement Income Tom DeVol, Registered Representative Sammons Securities, LLC 62 Harding Street, Newton, MA 02465 617.964.6404 Securities offered through Sammons Securities Company, Member FINRA/SIPC CAR #0311-4619 (03/11)
- 2. Then and Now Asset allocation before and after retirement Before retirement After retirement Accumulation Disbursement Long-term growth Long-term growth Current savings Current income Time to recover Downturns immediately felt Tax-deferred growth Minimum required distributions Taxes 息 2011 Morningstar. All Rights Reserved. 3/1/2011 CAR #0311-4619 (03/11)
- 3. Retirees Face Numerous Risks Withdrawals Longevity What rate is sustainable? Longretirement horizons Sequencing by tax bracket a couple aged 65 has 25% Managing RMDs chance of a survivor living to age 96 Retiree spending Solvency Replacement ratio Pension plans and retiree Essential versus lifestyle benefitsa thing of the past expenses Social Security and Medicare Medical expenses Retirement income Market volatility Savings Uncertain returns and Under-funded defined income contribution accounts Impact of point in time Most Americans have an Asset allocation and location enormous savings gap Inflation Erodes the value of savings and reduces returns Health-care inflation 4.3% 息 2011 Morningstar. All Rights Reserved. 3/1/2011 CAR #0311-4619 (03/11)
- 4. Retirees Should Plan for a Long Retirement Probability of a 65-year-old living to various ages 100% Male Female At least one spouse 78 81 86 75 85 88 91 50 91 93 96 25 0 years old 65 70 75 80 85 90 95 100 105 Source: Annuity 2000 Mortality Tables. 息 2011 Morningstar. All Rights Reserved. 3/1/2011 CAR #0311-4619 (03/11)
- 5. Retirees Need to Replace a Significant Amount of Income in Retirement Average replacement ratios at various pre-retirement income levels 95% Replacement ratio 94% 90 90% 88% 86% 85 85% 84% 81% 80 78% 78% 77% 77% 75 70 65 $20k 30 40 50 60 70 80 90 150 200 250 Pre-retirement income Data is from Aon Consultings 2008 Replacement Ratio Study: A Measurement Tool for Retirement Planning. 息 2011 Morningstar. All Rights Reserved. 3/1/2011 CAR #0311-4619 (03/11)
- 6. Personal Savings Expected to Play a Larger Role in Retirement Survey of retirement income sources 100% 96% Workers (Expected) Retirees (Reported) 80 77% 78% 77% 75% 60 58% 56% 52% 44% 40 23% 20 0 Social Security Employer-sponsored Employer-provided Other personal Employment retirement savings traditional pension savings/investments plan (ex. 401k) plan (incl. IRA) Source: Employee Benefit Research Institute, 2010 Retirement Confidence Survey. 息 2011 Morningstar. All Rights Reserved. 3/1/2011 CAR #0311-4619 (03/11)
- 7. Social Security is Under Strain Number of beneficiaries per 100 covered workers 60 50 40 30 High cost Intermediate Low cost 20 10 Historical Estimated 0 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 Low-costassumes relatively rapid economic growth, low inflation, and favorable (from the standpoint of program financing) demographic and program-specific conditions; Intermediaterepresents the Trustees best estimates of likely future demographic, economic, and program-specific conditions; High-cost assumes relatively slow economic growth, high inflation, and unfavorable demographic and program-specific conditions. 息 2011 Morningstar. All Rights Reserved. 3/1/2011 CAR #0311-4619 (03/11)
- 8. Inflation Significantly Erodes Purchasing Power Over Time Effects of 3% inflation on purchasing power $100k $85,873 80 $73,742 $63,325 60 $54,379 $46,697 40 $40,101 20 0 0 Years 5 10 15 20 25 30 Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. 息 2011 Morningstar. All Rights Reserved. 3/1/2011 CAR #0311-4619 (03/11)
- 9. Inflation and Taxes Reduce Returns Compound annual returns 19262010 Stocks Bonds Cash 10% 9.9% 8 6.7% 6 5.5% 4.7% 4 3.6% 2.4% 2 0.4% 0.6% 0 0.7% Return After After taxes Return After After taxes Return After After taxes inflation & inflation inflation & inflation inflation & inflation Past performance is no guarantee of future results. Assumes reinvestment of income and no transaction costs. Inflation rate over the time period 19262010 was 3.0%. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. 息 2011 Morningstar. All Rights Reserved. 3/1/2011 CAR #0311-4619 (03/11)
- 10. Sustainable Withdrawal Rates Vary Over Time Rolling 30-year periods 19262010 12% 75% stocks/25% bonds 50% stocks/50% bonds 25% stocks/75% bonds 10 8 6 4 2 Jan 1926 1931 1936 1941 1946 1951 1956 1961 1966 1971 1976 1981 Dec 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. 息 2011 Morningstar. All Rights Reserved. 3/1/2011 CAR #0311-4619 (03/11)
- 11. Withdrawal Rate You Can Sustain May Be Lower Than You Think 6% Average: 19262010 6.14% 5 5.30% 4 4.44% 3 2 1 0 75% Stocks/ 50% Stocks/ 25% Stocks/7 25% Bonds 50% Bonds 5% Bonds Past performance is no guarantee of future results. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. 息 2011 Morningstar. All Rights Reserved. 3/1/2011 CAR #0311-4619 (03/11)
- 12. The Sequence of Returns Can Significantly Affect Your Retirement Actual historical return Reversed historical $500k sequence return sequence $2.5 mil 400 2.0 300 1.5 200 1.0 100 0.5 0 1973 1977 1981 1985 1989 1993 Aug 1993 1989 1985 1981 1977 1973 94 Past performance is no guarantee of future results. Hypothetical value of $500,000 invested at the beginning of 1973 and August 1994. Assumes inflation-adjusted withdrawal rate of 5%. Portfolio: 50% large-company stocks/50% intermediate-term bonds. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. CAR #0311-4619 (03/11) 息 2011 Morningstar. All Rights Reserved. 3/1/2011
- 13. Discussion of Simulation Criteria and Methodology Many of the following images were created using Monte Carlo parametric simulation. This model estimates the range of possible outcomes based on a set of assumptions including arithmetic mean (return), standard deviation (risk), and correlation for a set of asset classes. The inputs used herein are the historical 19262010 figures. The risk and return of each asset class, cross- correlation, and annual average inflation over this time period follow. Stocks: risk 20.4%, return 11.9%; Bonds: risk 5.7%, return 5.5%; Correlation 0.01; Inflation: return 3.1%. Note that other investments not considered may have characteristics similar or superior to those being analyzed. Each simulation produces 35 randomly selected return estimates consistent with the characteristics of the portfolio to estimate the return distribution over a 35-year period. Each simulation is run 5,000 times, to give 5,000 possible 35-year scenarios. A limitation of the simulation model is that it assumes the distribution of returns is normal. Should actual returns not follow this pattern, results may vary. 息 2011 Morningstar. All Rights Reserved. 3/1/2011 CAR #0311-4619 (03/11)
- 14. Interpreting Confidence Levels in Simulation Confidence level Chance of exceeding Chance of falling short 50% 50% 50% 75% 75% 25% 90% 90% 10% (More conservative) 息 2011 Morningstar. All Rights Reserved. 3/1/2011 CAR #0311-4619 (03/11)
- 15. Simulation Can Illustrate the Probability of Achieving Outcomes $10 A visual interpretation of confidence levels in simulation mil 1 mil 100k 50% confidence level 75% confidence level 90% confidence level 10k 65 Years old 70 75 80 85 90 95 100 IMPORTANT: Projections generated by Morningstar regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Results may vary over time and with each simulation. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. 息 2011 Morningstar. 3/1/2011 CAR #0311-4619 (03/11)
- 16. High Withdrawal Rates Will Quickly Deplete Your Assets Simulated portfolio values (90% confidence level) 500k 100 50 Withdrawal rate: 7% 8% 6% 5% 4% 10 65 years old 70 75 80 85 90 95 100 IMPORTANT: Projections generated by Morningstar regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Results may vary over time and with each simulation. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. 息 2011 Morningstar. 3/1/2011 CAR #0311-4619 (03/11)
- 17. Market Performance Affects Chance of Portfolio Shortfall $1 mil Six percent inflation-adjusted withdrawal at three confidence levels 500k 50% confidence level 75% confidence level 90% confidence level 100 50 10 65 years old 70 75 80 85 90 95 100 IMPORTANT: Projections generated by Morningstar regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Results may vary over time and with each simulation. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. 息 2011 Morningstar. 3/1/2011 CAR #0311-4619 (03/11)
- 18. Retirement Assets Deplete Faster with Higher Withdrawal Rates 10% 74 Withdr. rate Age to which a portfolio may last 9 75 based on withdrawal rate (90% confidence level) 8 77 Portfolio Stocks 50% 7 Bonds 40 79 Cash 10 6 82 5 86 4 94 3 100+ Age 65 70 75 80 85 90 95 100 IMPORTANT: Projections generated by Morningstar regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Results may vary over time and with each simulation. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. CAR #0311-4619 (03/11) 息 2011 Morningstar. 3/1/2011
- 19. Probability of Meeting Income Needs 87% 98% 96% 93% 90% 4% Withdrawal rate 38% 75% 82% 81% 79% 5% Various withdrawal rates and portfolio 5% 31% 56% 64% 65% 6% allocations over a 25- year retirement 0% 6% 30% 45% 51% 7% 0% 0% 13% 29% 39% 8% 100% 75% B 50% B 25% B 100% Bonds 25% S 50% S 75% S Stocks IMPORTANT: Projections generated by Morningstar regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Results may vary over time and with each simulation. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. 息 2011 Morningstar. All Rights Reserved. 3/1/2011 CAR #0311-4619 (03/11)
- 20. Providing for Retirement Income Retirement risks can be managed by intelligent combination of funds, stocks and bonds, and insurance products How do you find the right asset mix for retirement? age and risk tolerance desire for consumption and bequest expenses and fees of product choices 息 2011 Morningstar. All Rights Reserved. 3/1/2011 CAR #0311-4619 (03/11)
- 21. Glossary of Indices The indices are presented to provide you ≒ Lehman Brothers Government/Credit Lehman Brothers Treasury Bond with an understanding of their historic Intermediate Index: Non-securitized Index: Composed of all US Treasury component of the U.S. Aggregate Index. publicly issued obligations. Includes only long-term performance, and are not The Lehman Brothers Government/Credit notes and bonds with a minimum presented to illustrate the performance of Intermediate Index includes Treasuries, outstanding principal amount of $50 any security. Investors cannot directly Government-Related issues and USD million and a minimum maturity of one purchase an index. Past performance is Corporates with remaining maturities year. Flower bonds are excluded. Total not indicative of future results. Individual between 1 to 9.99 years. return comprises price appreciation/ depreciation and income as a percentage investor results will vary. Lehman Brothers US Government of the original investment. Long-Term Index: Non-securitized р Citigroup WGBI Non-US Index: component of the U.S. Aggregate Index ≒ Lehman Brothers Investment Grade Unhedged is a subset of the WBGI includes Treasuries (maturities greater Corporate Index: The U.S. Corporate index that includes Domestic than 10 years), Government-Related Index covers USD-denominated, Sovereign issued debt of Australia, issues, and USD Corporates. investment grade, fixed rate, taxable securities sold by industrial, utility and Austria, Belgium, Canada, Denmark, Lehman Brothers Corporate Long financial issuers. It includes publicly U.S. Finland, Germany, Greece, Ireland, Term Bond Index: A subset of the corporate and foreign debentures and Italy, Japan, the Netherlands, Lehman Brothers Corporate Bond Index secured notes that meet specified covering all corporate, publicly issued, maturity, liquidity, and quality Norway, Poland, Portugal, Singapore, fixed-rate, nonconvertible US debt issues requirements. Securities in the index roll Spain, Sweden, Switzerland, and the rated at least Baa with at least $50 up to the U.S. Credit and U.S. Aggregate United Kingdom. million principal outstanding and maturity indices. The U.S. Corporate Index was greater than 10 years. launched on January 1, 1973. р MSCI EAFE: The MSCI EAFE速 Index (Europe, Australasia, Far East) is a free-float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the US & Canada. CAR #0311-4619 (03/11)
- 22. Glossary of Indices (continued from previous page) р Lehman Brothers Mortgage- ≒ Merrill Lynch US Treasury Bill Index: ≒ Russell 1000 Growth Index: Measures Backed Securities Index: The LB The Merrill Lynch US Treasury Bill Index the performance of those companies in tracks the performance of USD the Russell 1000 Index with higher price- Mortgage-Backed Securities Index denominated US Treasury Bills publicly to-book ratios and higher forecasted includes 15 and 30 year fixed rate issued in the US domestic market. growth values. securities backed by mortgage pools Qualifying securities must have at least Russell Mid Cap Index: Measures the one month remaining term to final ≒ of the Government National Mortgage performance of the 800 smallest Association (GNMA), Federal Home maturity and a minimum amount outstanding of USD 1 billion. companies in the Russell 1000 Index, Loan Mortgage Corporation (FHLMC), which represents approximately 30% of and Federal National Mortgage ≒ Russell 2000 Value Index: Measures the total market capitalization of the the performance of those Russell 2000 Russell 1000 Index. Association (FNMA). companies with lower price-to-book ratios Russell 1000 Value Index: The Russell and lower forecasted growth values. ≒ р Lehman Brothers High Yield: The 1000 Value Index measures the Lehman Brothers Corporate High- ≒ Russell 2000 Growth Index: Measures performance of companies in the Russell Yield Index covers the USD the performance of those Russell 2000 1000 Index with lower price-to-book companies with higher price-to-book ratios and lower forecasted growth values denominated, non-investment grade, ratios and higher forecasted growth fixed-rate, taxable corporate bond values. ≒ S&P 500 Index: The S&P 500 Index market. Securities are classified as consists of 500 stocks chosen for market size, liquidity, and industry group high-yield if the middle rating of representation. It is a market-value- Moodys, Fitch, and S&P is Ba1/BB+/ weighted index, with each stock's weight BB+ or below. A small number of in the Index proportionate to its market unrated bonds are included in the value. The "500" is one of the most index. The index excludes Emerging widely used benchmarks of U.S. equity performance. Markets debt. CAR #0311-4619 (03/11)
- 23. Important Disclosures Asset Allocation: Asset allocation cannot eliminate the risk of fluctuating prices and uncertain returns. Fixed Income Securities: Investing in fixed income securities involves certain risks such as market risk if sold prior to maturity and credit risk especially if investing in high yield bonds, which have lower ratings and are subject to greater volatility. All fixed income investments are subject to availability and change in price and may be worth less than original cost upon redemption or maturity. In addition to market risk, there are certain other risks associated with an investment in fixed income funds, such as default risk, the risk that the company issuing debt securities will be unable to repay principal and interest, and interest rate risk, the risk that the security may decrease in value if interest rates increase. International/Emerging Market Securities or Funds: Investing in international securities or funds that invest in these securities takes on special risk. These risks include, but are not limited to, currency risk, political risk, and risk associated with varying accounting standards. Investing in emerging markets normally accentuates these risks. Sector Funds or Portfolios: he investor should note that funds or portfolios that invest exclusively in one sector or industry carry additional risks. The lack of industry diversification subjects the investor to increased industry specific risks. Non-Diversified Funds or Portfolios: Non-Diversified Funds or Portfolios that invest more of their assets in a single issuer involve additional risks, including share price fluctuations, because of increased concentration of investments. Small Cap Securities or Funds: The prices of small- and mid-cap company stocks are generally more volatile than large company stocks. They often involve higher risks because small- and mid-cap companies may lack the management expertise, financial resources, product diversification and competitive strengths to endure adverse economic conditions. High Yield Bonds or Bond Funds: Investing in lower rated debt securities (commonly referred to as junk bonds) or funds that invest in such securities involves additional risk because of the lower credit quality of the security or fund portfolio. These securities or funds are subject to a higher level of volatility and increased risk of default, or loss of principal. In addition to market risk, there are certain other risks associated with an investment in a convertible bond, such as default risk, the risk that the company issuing debt securities will be unable to repay principal and interest and interest rate risk, the risk that the security may decrease in value if interest rates increase. Real Estate Investment Trusts (REITS): Investing in REITS involves special risks, including the potential for illiquidity of REIT securities if they are not listed on an exchange. REITS have limited historical data and their historical behavior has varied over time. Government Bonds and Treasury Bills are guaranteed by the U.S. Government, and if held to maturity, as with all bonds offer a fixed rate of return and principal. Stocks are not guaranteed, represent ownership in a company and offer long term growth potential but may fluctuate more and provide less current income than other investments. CAR #0311-4619 (03/11)
- 24. Important Disclosures Securities and Insurance Products: NOT INSURED BY FDIC OR ANY MAY LOSE VALUE NOT A DEPOSIT OF OR GUARANTEED BY A BANK OR FEDERAL GOVERNMENT AGENCY ANY BANK AFFILIATE Accounts carried by First Clearing, LLC, member New York Stock Exchange and SIPC. CAR #0311-4619 (03/11)