Guide to Retirement 2013 Edition

Transcription

1 Guide to Retirement 2013 Edition 1

2 Table of contents Setting the stage Factors that may influence an individual s ability to retire... 4 Saving Behaviors and best practices in saving for retirement...15 Spending Behaviors and considerations for living in retirement...21 Investing Building a retirement portfolio

3 Page reference Setting the stage 5 Life expectancy probabilities 6 Older Americans in the workforce 7 Managing expectations of ability to work 8 Social Security 9 Inflation impacts on older Americans 10 Spending and inflation 11 Cost of health care in retirement 12 Rising annual health care costs 13 Pension plan coverage 14 Historic tax rates Saving 16 Retirement savings checkpoints 17 Benefit of saving early 18 Savings rate 19 The toxic combination of varied savings and loans or withdrawals 20 Evaluate a Roth IRA Spending 22 Typical wealth holdings at retirement 23 Sources of income at retirement 24 Dollar cost ravaging impact of market returns on distribution 25 Changes in spending 26 Changes in spending by age and household size 27 Effects of traditional withdrawal rates on a typical balanced portfolio Investing 29 Structuring a portfolio to match investor goals 30 Structuring a portfolio: The bucket strategy 31 Diversification 32 Impact of being out of the market 33 Major asset classes vs. inflation 34 Asset class returns Appendix 35 Traditional IRAs vs. Roth IRAs Traditional IRAs vs. Roth IRAs Medicare definitions and information 38 Annuity basics 3

4 Setting the stage Setting the stage Retirement is different now than it was for previous generations. Many issues are interconnected, which need careful consideration when developing a retirement strategy. Common misconceptions I ll continue to work during retirement. 70% of employed Americans plan to work beyond age 65 but only 28% of current retirees actually did. A number of factors can cause people to retire earlier than expected, including health problems, employer issues and family obligations. Page 7 My spending patterns won t change much. The inflation rate is higher for retirement-age Americans who spend disproportionately more on items that rise fastest in price, such as health care. Pages 9 and 10 My medical expenses will be covered. Out-of-pocket medical costs make up 14% of a retiree s total expenses. Page 10 It is estimated that a woman retiring in 2020 without employer coverage would need as much as $357,000 for insurance premiums and other health care costs. Page 11 4

5 Life expectancy probabilities If you re 65 today, the probability of living to a specific age Setting the stage 100% 80% 60% 40% 20% 71% 60% 88% 31% Women Men Couple at least one lives to specified age 45% 20% Count on longevity: Life expectancy tells only half the story. Plan on the probability of living much longer, perhaps 30 plus years in retirement. For example, there is a 45% chance that one spouse will live to age 90. 0% 3% 1% 80 years 90 years 100 years 4% Source: Society of Actuaries, Key Findings and Issues, Longevity, 2011 Risks and Process of Retirement Survey Report, June

6 Older Americans in the workforce Setting the stage Percent of people over 65 currently in the civilian labor force, % 18.5% 100% 18% 80% 16% 14% 12% 10% 60% 40% 20% 0% -20% Major reasons why people work in retirement Decreased value of savings or investments Labor Department projected percentage change in labor force by age, % -12.4% 16 to % 25 to % 55 to % 65 to % 75+ It s still off to work I go: More people are working beyond the age of 65, primarily motivated by choice, but also for financial reasons. Needs Buy extras Make ends meet 17% 21% Keep insurance or benefits 15% To stay active and involved 60% Wants Enjoy working 59% Job opportunity 26% Try new career 6% 0% 10% 20% 30% 40% 50% 60% Source (top left chart): Bureau of Labor Statistics. Data as of December 31, Source (top right chart): Bureau of Labor Statistics. Data as of December 31, Latest available data as of December 31, Source (bottom chart): Employee Benefit Research Institute and Mathew Greenwald & Associates, Inc., 2010 Retirement Confidence Survey. Data as of March Latest available 6 data through December 31, 2012.

7 Managing expectations of ability to work Setting the stage Current expectations of retirement vs. experience of actual retirees 100% 80% 60% 40% Retire before age 65 Retire at age 65 or over 70% Median Retirement Age Workers (expected) 65 Retirees (actual) 61 65% Negative reasons cited for retiring earlier than planned Health problems or disability Other workrelated reasons Changes at company (downsizing/closing) 23% 21% 51% Forced retirement: Although more Americans are working past age 65, not everyone is able to. 24% 28% Care for spouse or family member 19% 20% Outdated skills 11% 0% Current workers expectations Experience of actual retirees 0% 10% 20% 30% 40% 50% 60% 70% Source: Employee Benefit Research Institute and Mathew Greenwald & Associates, Inc., 2012 Retirement Confidence Survey. 7

8 Social Security Setting the stage Social Security inflation-adjusted break-even analysis Estimated total benefits $900,000 $800,000 Claim at age 62: $1,903 per month $700,000 Claim at age 66: $2,745 per month $600,000 Claim at age 70: $4,026 per month $500,000 $400,000 $300,000 $200,000 $100,000 $ Social Security break-even data Claim at age 62 Claim at age 66 Claim at age $224,749 $173,565 $48, $407,040 $415,774 $366, $474,831 $505,848 $484, $546,472 $601,037 $609, $622,181 $701,632 $741, $702,188 $807,938 $881,521 Planning opportunity: Delaying benefits means having more money to spend later, compensating for increased longevity. Source: Break-even calculated using the Social Security Administration calculator for beginning values at each age. Assumes maximum benefits are received for individuals turning 62 and 1 month, 66 and 70 in 2013, and assumes the benefit will increase each year based on the Social Security Administration 2012 Trustee s Report intermediate estimates (starting at 1.9% in 2013 and gradually increasing to 2.8% in 2019). Monthly amounts without the costs of living adjustments (not shown on the chart) are: $1,903 at age 62; $2,523 at age 66; and $3,331 at age 70. 8

9 Inflation impacts on older Americans Comparison of inflation, Older households vs. those close to retirement, 1985 = 100 Setting the stage years of age 65 + years of age + 5% over 27 years Age and inflation: Even households close to retirement should plan for the impact of higher inflation. Staying diversified may help to overcome the effects of inflation eroding purchasing power Source: Estimates based on Consumer Price Index and Expenditure Surveys, BLS, J.P. Morgan Asset Management. Data as of December 31,

10 Spending and inflation Spending by age and category Setting the stage 50% 40% 30% 20% 10% 0% 14% 9% Medical care 38% 39% years of age 65 + years of age 20% 16% 16% 17% 5% 5% 2% 6% 6% 1% 4% 3% Other Food and bev. Housing Transportation Education Entertainment Apparel Losing ground: Inflation disproportionately affects older Americans due to differences in spending habits and price increases in those categories. Average inflation by spending category, % 5.2% 5.0% 4.0% 2.0% 0.0% 3.0% 2.8% Medical care Other Food and bev. Housing Transportation 2.6% 2.0%* Education Entertainment 0.9% 0.9% * The 2.0% rate is an average of the education costs of all age groups, which differs from the inflation rate of higher education costs (i.e., college tuition and fees) that is typically much higher. Source (Top chart): BLS, Consumer Expenditure Survey. Data as of December 31, Source (Bottom chart): BLS, Consumer Price Index, J.P. Morgan Asset Management. Data represents annual percentage increase from December 1981 through December 2012 with the exception of entertainment and education, which were first published in Other category consists of personal care products (1.4%), reading (.4%), tobacco (.6%) and other miscellaneous (2.1%). 10 Apparel

11 Cost of health care in retirement Setting the stage Present value savings needed to fund out-of-pocket health care costs for retirees without employer medical coverage $400,000 $300,000 $200,000 $100,000 $0 $185,000 $70,000 $210,000 $93,000 Men Women Retire in 2012 $313,000 $109,000 $357,000 $156,000 Men Women Retire in 2020 Cover 90% of possible health outcomes and prescription drug expenses Cover 50% of possible health outcomes and prescription drug expenses If you have retiree medical coverage through your employer, your out-of-pocket costs may be less and your plan benefits could be greater. Only 27% of retirees report having access to employer medical coverage.* Preventative care: Although estimates of future health care costs continue to change, it is important to include potential medical expenses in your retirement planning on a personalized and annual basis. Source: Employee Benefit Research Institute. Issue Brief No. 351, December 2010 and EBRI Notes, Vol. 33, No. 10, October Monte Carlo simulation analysis performed to calculate with a 90% and median certainty that a retiree will have enough savings to cover medical costs for Medigap, Medicare Part B Premiums and out-of-pocket health care costs for life, if retiring at age 65. This simulation does not include long-term care expenses. Please note that this simulation is for illustrative purposes only. There is no guarantee that the figures shown would be sufficient to cover out-of-pocket medical expenses. Chart includes Medicare Part D premium. * Employee Benefit Research Institute and Mathew Greenwald & Associates, Inc., 2011 Retirement Confidence Survey. 11

12 Rising annual health care costs Estimated annual out-of-pocket health care costs for a 65-year-old retiring in 2013 Setting the stage Dollars 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 $7,359 $4,642 $4,041 $15,650 $13,843 $12,218 90% percentile 75% percentile 50% percentile A growing concern: Lifetime retirement health care cost estimates may be overwhelming, therefore annual health care costs may be easier to digest when planning for retirement expenses Age For illustrative purposes only. Source: Employee Benefit Research Institute (EBRI), July 26, Based on national average cost estimates for Medicare Parts A, B, D and Medigap Plan F. EBRI derived inflation estimates from US CBO estimates. On average, health care costs are estimated to increase 5.7% for the 50th percentile, 5.6% for the 75th percentile and 3.9% for the 90th percentile. Vision, dental and long-term care expenses are not included. Variation in costs by geographic region are not taken into account. Assumes continued implementation of the Patient Protection and Affordable Care Act. The costs at 90% actually dip down in 2019 due to the implementation of the Medicare prescription drug donut hole being filled in as applied to Medicare prescription drug costs. 12

13 Pension plan coverage Setting the stage Participation by plan type Distribution of private-sector, active-worker participants, % 70% 60% 50% 40% 30% Defined contribution (DC) only 69% Both DB & DC 24% Create your own pension: More employers are shifting from offering traditional pension plans to more employee-driven options like 401(k) plans. 20% 10% Defined benefit (DB) only 7% 0% Source: U.S. Department of Labor Form 5500 Summaries , Pension Benefit Guaranty Corporation, Current Population Survey , EBRI estimates

14 Historic tax rates Historical view of top marginal tax rate Setting the stage 100% 90% 80% 70% 60% 50% 40% 30% 20% 2013: 39.6% Contingency planning: Taxes are beginning to rise to mitigate government deficits and increasing mandatory spending. Those in the highest tax bracket also may be subject to additional taxes such as the recently enacted 3.8% Medicare surtax. 10% 0% Source: The Urban-Brookings Tax Policy Center, Historical Individual Income Tax Parameters. Data as of January 31,

15 Saving The single most important decision individuals can make about retirement is to take responsibility for funding it themselves. Living expenses, health care costs, Social Security, pensions and future employment are all uncertain. But saving today is one way to prepare for a more stable tomorrow. Saving Common misconceptions I ve already started saving a little I should be okay. In 2012, only 42% of workers (and/or spouses) have tried to calculate how much money they will actually need to save for a comfortable retirement.* Use the retirement savings checkpoint chart to see if you are on track to reach your goals. Page 16 Retirement is so far away I have plenty of time to think about it. The sooner you begin, the more time you have to maximize the power of compounding. Page 17 Start saving early and regularly. Early withdrawals, loans and missed contributions can result in lower savings, less compounding and fewer assets at retirement. Page 19 *Source: Employee Benefit Research Institute and Mathew Greenwald & Associates, Inc., 2012 Retirement Confidence Survey. 15

16 Retirement savings checkpoints Current age $50,000 $75,000 $100,000 $150,000 $200,000 $250,000 $300,000 $400,000 Checkpoint Checkpoint Checkpoint Checkpoint Checkpoint Checkpoint Checkpoint Checkpoint (x Current Salary) (x Current Salary) (x Current Salary) (x Current Salary) (x Current Salary) (x Current Salary) (x Current Salary) (x Current Salary) Saving How to use: Go to the intersection of your current age and your closest current salary. Multiply your salary by the checkpoint shown to get the amount you should have saved today, assuming you continue annual contributions of 5% going forward. Example: for a 40-year-old making $100,000: $100,000 x 2.2 = $220,000 This chart is for illustrative purposes only and must not be used, or relied upon, to make investment decisions. J.P. Morgan s model is based on J.P. Morgan Asset Management s (JPMAM) proprietary long-term capital markets assumptions (10 15 years). The resulting projections include only the benchmark return associated with the portfolio and do not include alpha from the underlying product strategies within each asset class. Post-retirement volatility assumption is 6.3%. Salary replacement rates are derived from Aon Consulting s 2008 Replacement Ratio Study data, which assumes individuals receive Social Security payments in retirement. Calculations assume an individual earning $50,000 at retirement will need to replace at least 30% of their pre-retirement income; individuals earning $75,000 will need to replace at least 37%; individuals earning $100,000 will need to replace at least 45%; individuals earning $150,000 will need to replace at least 61%; individuals earning $200,000 will need to replace at least 69%; individuals earning $250,000 will need to replace at least 74%; individuals earning $300,000 will need to replace at least 79%; and those earning $400,000 will need to replace 87%. Allocations, assumptions and expected returns are not meant to represent JPMAM performance. Given the complex risk/reward trade-offs involved, we advise clients to rely on judgment as well as quantitative optimization approaches in setting strategic allocations. References to future returns for either asset allocation strategies or asset classes are not promises or even estimates of actual returns a client portfolio may achieve. 16 Model assumptions: Pre-retirement investment return: 7.0% (60% S&P 500/40% BarCap Agg) Post-retirement investment return: 5.0% (30% S&P 500/70% BarCap Agg) Retirement age: 65 Years in retirement: 30 Wage growth rate (inflation): 2.5% Confidence level represented: 80% Assumed annual contribution rate: 5%

17 Benefit of saving early Growth of savings accounts $1,200,000 $1,142,811 Saving $1,000,000 $800,000 $600,000 Susan invests $5,000 annually between the ages of 25 and 35 In total, she invests $50,000 Bill invests $5,000 annually between the ages of 35 and 65 In total, he invests $150,000 Chris invests $5,000 annually between the ages of 25 and 65 In total, he invests $200,000 $602,070 Saving fundamentals: Harnessing the power of compounding can greatly impact the amount of savings over the long term. $400,000 $540,741 $200,000 $ The above example is for illustrative purposes only and not indicative of any investment. Account value in this example assumes a 7% annual return. Source: J.P. Morgan Asset Management. Compounding refers to the process of earning return on principal plus the return that was earned earlier. Age 17

18 Savings rate Personal savings rate Annual, % of disposable income 12% Saving 10% 8% 6% 4% 2% 0% 59 Avg. 7% 2012: 6.50% 3.65% Source: J.P. Morgan Asset Management, The Bureau of Economic Analysis. Personal savings rate is calculated as personal savings (after-tax income personal outlays) divided by after-tax income. Employer and employee contributions to retirement funds are included in after-tax income but not in personal outlays, and thus are implicitly included in personal savings. Savings rate data as of December 31, Remember retirement: Ongoing low savings rates could have negative effects on the retirement preparedness of Americans. As of January 23, 2013 the personal savings rate was reported as 3.65%. On January 31, this number was revised to 6.5% mostly due to an enormous increase in personal income as dividends and early bonuses were paid out before year end to avoid the tax increase. 18

19 The toxic combination of varied savings and loans or withdrawals Saving Growth of a 401(k) investment $1,400,000 $1,200,000 $1,000,000 $800,000 $600,000 $400,000 $200,000 $ Age Assumed 401(k) contributions 30% 20% 10% 0% -10% -20% -30% Portfolio with steady 8% contributions Portfolio with varied contributions Loan repayment 10k loan to buy a house Age Loan repayment 10k loan for college Varied contribution Steady 8% contributions 10k preretirement withdrawal Source: J.P. Morgan Asset Management. For illustrative purposes only. Hypothetical portfolio is assumed to be invested 40% in the Barclays Capital U.S. Aggregate Index and 60% in the S&P 500 Total Return index from Starting salary of $30,000 increasing by 2% each year. 65 Avoid temptation: Consistent saving can help you meet your retirement goals. Taking loans and early withdrawals from a 401(k) account can drastically impact your total savings. Investing with a steady contribution rate over time may ensure maximum growth potential.

20 Evaluate a Roth IRA Tax rates decrease 10% in retirement $500,000 Tax rates increase 10% in retirement $500,000 Saving Dollar balance remaining in IRA $400,000 $300,000 $200,000 $100,000 $400,000 $300,000 $200,000 $100,000 Consider your options: A Roth IRA may be a hedge against potential future tax increases, which may allow your savings to last longer. $ Age $ Age Traditional IRA (taxed on way out) Roth IRA (taxed on way in) For illustrative purposes only. Hypothetical accounts contribute $2,000 before tax ($1,600 to a Roth and $2,000 to a traditional IRA) from ages 25 to 65 with a pre-retirement marginal tax rate of 20%. The assumed annual rate of return is 7%. In retirement, the person withdraws $32,000 after tax ($32,000 for Roth in both scenarios, $35,556 in the 10% decrease scenario and $45,714 in the 10% increase scenario for the regular IRA) each year until the account is depleted. The breakeven point in the 10% rate increase scenario will change depending on the specific circumstances of the individual and tax rates. Source: J.P. Morgan Asset Management. 20

21 Spending Determining your income needs during retirement is a complex equation. During your working years, the goal was to save and accumulate as much as possible for the future. Now the challenge becomes managing your portfolio by withdrawing some money for today s expenses and investing the rest for tomorrow. Spending Common misconceptions I ve already hit my savings target. I should be fine in retirement with the lower cost of living. Social Security plays a big role for many current retirees, but the system s future remains uncertain. Make contingency plans to prepare for potential reductions in traditional income sources like Social Security and pensions. Page 23 Spending may not decrease at all in the first few years of retirement. Some expenses tend to decline with age while others remain steady or increase. Page 25 As long as I withdraw a steady amount, I will be okay. Withdrawing assets in volatile markets early in retirement can ravage a portfolio. Adjust your plan and strategy regularly. Page 24 There is potential danger in investing too conservatively or withdrawing too aggressively. Either may increase the risk of tapping into principal and running out of money. Page 27 21

22 Typical wealth holdings at retirement Wealth holdings of a typical household approaching retirement Spending Other Other Non-Financial Assets Assets 3% 3% Business Business Assets Assets 2% 2% Financial Financial Assets Assets 4% 4% Defined Defined Contribution 7% 7% Defined Defined Benefit Benefit Social Social Security Security 18% 18% 44% 44% Primary Primary House House 20% 20% Other Other Non-Financial Assets Assets 2% 2% Business Business Assets Assets 1% 1% Financial Financial Assets Assets 3% 3% Defined Defined Contribution 7% 7% Social Social Security Security 49% 49% Defined Defined Benefit Benefit 23% 23% Primary Primary House House 14% 14% Losing ground: As of 2010, Americans had experienced a 15% decline in total wealth as they approached retirement. As wealth holdings decline, Social Security and Defined Benefit holdings may play a bigger role Based on total average wealth of $676,600 Based on total average wealth of $582,100 Note: The typical household approaching retirement refers to the mean of the middle 10% of the sample of households headed by an individual aged Source (Left chart): Center for Retirement Research calculations from U.S. Board of Governors of the Federal Reserve System, 2007 Survey of Consumer Finances, Washington, DC. Source (Right chart): Center for Retirement Research calculations from U.S. Board of Governors of the Federal Reserve System, Survey of Consumer Finances (SCF), Latest available data as of December 31,

23 Sources of income at retirement Sources of retirement income Average for age 65 and over Other 2% curity Spending Income from Assets 11% Pension and Annuities 20% Social Security 39% Creating your income stream: On average, work/earnings and Social Security provide about two-thirds of retirement income for Americans. What assets will you have to draw from in retirement? Work/Earnings 28% 2011 Source: EBRI (Employee Benefit Research Institute) Databook on Employee Benefits, Chapter 7. Data as of December 31,

24 Dollar cost ravaging impact of market returns on distribution Spending Growth of investment $1,400,000 $1,200,000 $1,000,000 $1,400,000 $800,000 $1,200,000 $600,000 $1,000,000 $400,000 $800,000 $200,000 $600,000$- $400,000 $200,000 overall rate of $- inflation (3%) each year 35.0% Rate of return: Assumed vs. actual 25.0% % 35.0% 5.0% 25.0% -5.0% 15.0% -15.0% 5.0% -25.0% -5.0% -35.0% -15.0% Hypothetical 30/70 portfolio return Assumed rate of return = 8% Hypothetical 30/70 portfolio return Assumed rate of return = 8% Age Assumptions: Enter retirement at age 60 with $1,000,000 Start with a 5.5% withdrawal of $55,000 Increase dollar amount of withdrawal by -25.0% Age Hypothetical 30/70 portfolio return Assumed rate of return = 8% Age 77 Hypothetical 81 30/70 Assumed rate of return 85 portfolio return = 8% % Age Source: J.P. Morgan Asset Management, Convergent Retirement Plan Solutions, LLC. Returns are based on a hypothetical portfolio is assumed to be invested 30% in the S&P 500 Total Return Index and 70% in the Barclays Capital U.S. Aggregate Index. The assumptions are presented for illustrative purposes only. They must not be used, or relied upon, to make investment decisions. There is no direct correlation between a hypothetical investment and the anticipated future return of an index. Past performance does not guarantee future results. 24 Sequence return risk: Withdrawing assets in volatile markets early in retirement can ravage a portfolio. Adjust your plan and strategy regularly. Results: Actual annual average return of our hypothetical portfolio over the sample period was 9.13%.

25 Changes in spending Spending Average spending patterns of various age groups by average household size $55,000 $50,000 $45,000 $40,000 $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $48,876 $ Age Housing Food & beverage Entertainment $44,730 Education Transportation Apparel & services $39,163 Health care Other $29,630 What to expect: On average, household spending appears to peak at then generally tends to decline with the exception of health care. Estimates based on average consumer expenditure from the Consumer Expenditure Survey for each age group excluding pension and cash contributions, BLS. Data as of September Source: J.P. Morgan Asset Management. 25

26 Changes in spending by age and household size Average spending patterns of various age groups by household size $60,000 Spending $50,000 $40,000 $30,000 $20, persons 2.2 persons 1.9 persons 1.6 persons The empty nest: A decline in the average household size plays a role in spending changes over time. $10,000 $ One person HH size Average HH size Two person HH size Estimates based on average consumer expenditure from the Consumer Expenditure Survey for each age group and household size excluding pension and cash contributions, BLS. Data as of September Source: J.P. Morgan Asset Management. 26

27 Effects of traditional withdrawal rates on a typical balanced portfolio Years of sustainable withdrawals for a portfolio of 60% equities and 40% bonds Projected outcomes for typical markets (50% confidence level) $1,200,000 Projected outcomes for extended poor markets (75% confidence level) $1,200,000 Spending Account balance $1,000,000 $800,000 $600,000 $400,000 $200,000 $1,000,000 $800,000 $600,000 $400,000 $200,000 Be cautious: Increasing your withdrawal rate can significantly reduce the number of years your retirement savings will last. $ $ % 5% 4% 6% 5% 4% These charts are for illustrative purposes only and must not be used, or relied upon, to make investment decisions. Hypothetical portfolios are composed of US Large Cap for equity and US Aggregate for fixed income with projected compound returns projected to be 7.25% and 3.50%, respectively. J.P. Morgan s model is based on J.P. Morgan Asset Management s (JPMAM) proprietary long-term capital markets assumptions (10 15 years). The resulting projections include only the benchmark return associated with the portfolio and does not include alpha from the underlying product strategies within each asset class. The yearly withdrawal amount is set as a fixed percentage of the initial amount of $1,000,000 and is then inflation adjusted over the period. Allocations, assumptions and expected returns are not meant to represent JPMAM performance. Given the complex risk/reward trade-offs involved, we advise clients to rely on judgment as well as quantitative optimization approaches in setting strategic allocations. References to future returns for either asset allocation strategies or asset classes are not promises or even estimates of actual returns a client portfolio may achieve. 27

28 Investing Invest for long-term growth potential and consider investing in a broader mix of assets. Financial risks don t end when careers do. If you re going to enjoy a long, rewarding retirement, you must anticipate and overcome the obstacles that are likely to arise along the way. Investing Common misconceptions The market is too volatile. I m going to sit on the sidelines for a bit so I don t lose everything. Don t wait to invest in volatile times. It can cause you to miss out on potential market rallies. Page 32 Set specific retirement goals upfront and keep focused on the long term during periods of volatility and uncertainty. Page 29 I should invest conservatively so I don t run the risk of losing my retirement assets. Retirement-age investors have potentially long time horizons, due to rising life expectancies. By maintaining an exposure to equities in retirement, you may better keep pace with rising prices, protecting your standard of living throughout retirement. Page 33 A well-diversified portfolio may provide a smoother ride over the long term. Pages 31 and 34 28

29 Structuring a portfolio to match investor goals Considerations Potential solutions Legacy What is the time horizon not only of yourself, but also of your heirs or endowment? Equities Alternatives* Investing Increasing risk/return Wants Needs What are your desires/wants? How much risk are you willing to take? What are your basic needs? What income sources do you have or will you need to create? Equities Bonds Social Security Pension Annuities Bonds Cash and Cash Alternatives Building your plan: It may be useful to match dependable income sources with fixed retirement expenses, while coordinating other investments with more discretionary expenses. For illustration purposes only. Source: J.P. Morgan Asset Management. Bonds are subject to interest rate risks. Bond prices generally fall when interest rates rise. The price of equity securities may rise or fall because of changes in the broad market or changes in a company s financial condition, sometimes rapidly or unpredictably. Equity securities are subject to stock market risk, meaning that stock prices in general may decline over short or extended periods of time. Investing in alternative assets involves higher risks than traditional investments and are suitable only for the long term. They are not tax efficient and have higher fees than traditional investments. They may also be highly leveraged and engage in speculative investment techniques, which can magnify the potential for investment loss or gain. *Equity, fixed income and cash are considered traditional asset classes. The term alternative describes all non-traditional asset classes. They include private and public equity, venture capital, hedge funds, real estate, commodities, distressed debt and more. 29

30 Structuring a portfolio: The bucket strategy Investing Diversified portfolios: n n Equities n n Bonds n n Alternatives* $ $ $ Spending Time-based segmentation: Aligning your time horizon with an investment approach may help you be more comfortable with maintaining diversified portfolio allocations in retirement. For illustration purposes only. Source: J.P. Morgan Asset Management. Bonds are subject to interest rate risks. Bond prices generally fall when interest rates rise. The price of equity securities may rise or fall because of changes in the broad market or changes in a company s financial condition, sometimes rapidly or unpredictably. Equity securities are subject to stock market risk, meaning that stock prices in general may decline over short or extended periods of time. Investing in alternative assets involves higher risks than traditional investments and are suitable only for the long term. They are not tax efficient and have higher fees than traditional investments. They may also be highly leveraged and engage in speculative investment techniques, which can magnify the potential for investment loss or gain. *Equity, fixed income and cash are considered traditional asset classes. The term alternative describes all non-traditional asset classes. They include private and public equity, venture capital, hedge funds, real estate, commodities, distressed debt and more. 30

31 Diversification Maximizing the power of diversification, % 15% 55% 4% 26% 13% 8% 8% 8% 22% Mix it up wisely: Diversification may provide better returns with less risk. 9% Investing Return: 7.43% Standard Deviation: 10.80% Return: 7.72% Standard Deviation: 9.87% Indexes and weights of the traditional portfolio are as follows: U.S. stocks: 55% S&P 500, U.S. bonds: 30% Barclays Capital Aggregate, International stocks: 15% MSCI EAFE. Portfolio with 25% in alternatives is as follows: U.S. stocks: 22.2% S&P 500, 8.8% Russell 2000; International Stocks: 4.4% MSCI EM, 13.2% MSCI EAFE; U.S. Bonds: 26.5% Barclays Capital Aggregate; Alternatives: 8.3% CS/Tremont Equity Market Neutral, 8.3% DJ/UBS Commodities, 8.3% NAREIT Equity REIT Index. Return and standard deviation calculated using Morningstar Direct. Charts are shown for illustrative purposes only. Past returns are no guarantee of future results. Diversification does not guarantee investment returns and does not eliminate risk of loss. Data as of December 31,

32 Impact of being out of the market Returns of S&P 500 $50,000 $47,836 (8.14% return) $45,000 Investing $40,000 $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $23,873 (4.37% return) $14,876 (1.93% return) This chart shows performance of a $10,000 investment between December 31, 1992 and December 31, 2012 when some of the best days were missed. $9,828 (-0.16% return) $6,680 (-2.07% return) $4,672 (-3.81% return) $3,340 (-5.41% return) Plan to stay invested: Trying to time the market is extremely difficult as opposed to remaining invested for the long term (both good and bad). When investors pull out at market lows, they may miss out on the rallies that usually follow. $0 Fully Invested Missed 10 best days Missed 20 best days Missed 30 best days Missed 40 best days Missed 50 best days Missed 60 best days This chart is for illustrative purposes only and does not represent the performance of any investment or group of investments. Source: Prepared by J.P. Morgan Asset Management using data from Lipper. 20-year annualized returns are based on the S&P 500 Total Return Index, an unmanaged, capitalization-weighted index that measures the performance of 500 large capitalization domestic stocks representing all major industries. Past performance is not indicative of future returns. An individual cannot invest directly in an index. Data as of December 31,

33 Major asset classes vs. inflation Growth of one dollar, $10,000 $1,000 Small Cap Stocks $2,936 Large Cap Stocks $732 Risk averse: Cash may not be an effective long-term solution. Investing $100 $10 $ Bonds $46 Treasury Bills $16 Inflation $10 Source: Morningstar, Inc., Financial Communications All rights reserved. Used with permission. Hypothetical value of $1 invested at year-end Assumes reinvestment of income and no transaction costs or taxes. Small Company Stocks represented by the fifth capitalization quintile of stocks on the NYSE for and the performance of the Dimensional Fund Advisors, Inc. (DFA) U.S. Micro Cap Portfolio thereafter; Large Company Stocks Standard & Poor s 500, which is an unmanaged group of securities and considered to be representative of the stock market in general; Government Bonds 20-year U.S. Government Bond; Treasury Bills 30-day U.S. Treasury Bill; Inflation Consumer Price Index. Government Bonds and Treasury Bills are guaranteed by the full faith and credit of the United States government as to the timely payment of principal and interest, while stocks are not guaranteed and have been more volatile than the other asset classes. Small-capitalization stocks typically carry more risk than stock funds investing in well-established blue-chip companies since smaller companies generally have a higher risk of failure. Historically, smaller companies stock has experienced a greater degree of market volatility than the average stock. This is for illustrative purposes only and not indicative of any investment. Past performance is no guarantee of future results. An investment cannot be made directly in an index. CDs, savings accounts and money market deposit accounts are insured by the FDIC for up to $100,

34 Asset class returns Investing 10-yrs '03 - ' Cum. Ann. MS CI MS CI MSCI Ba rc la ys MS CI MS CI MS CI REITs REITs REITs REITs REITs EME EME EME Agg EME EAFE EME EME % % % 3 5.1% % 5.2 % % % 8.3 % 19.7 % 376.0% 6.6 % % 6.0 % 16.9 % Russe ll MS CI DJ UBS MS CI DJ UBS MS CI Russe ll Ba rc la ys MS CI MS CI Ca sh REITs REITs REITs EME Cmdty EME Cmdty EAFE Agg EME EME % % % % 16.2 % 1.8 % % % 7.8 % 18.6 % 204.6% 5 % % 4.6 % 11.8 % MS CI MS CI MS CI MS CI MSCI Ma rke t MS CI Ma rke t MS CI Russe ll Russe ll REITs REITs EAFE EAFE EAFE EAFE EAFE Ne utra l EME Ne utra l EAFE % % % % 11.6 % 1. 1% % 19.2 % 4.5 % 17.9 % 152.8% 3.1% %.8 % 9.7 % Russe ll Russe ll Ma rke t Asse t Russe ll DJ UBS S &P Russe ll Russe MSCIll MSCI MS CI REITs REITs Ne utra l Alloc Cmdty E2 A0 0F 0E EAFE E A F E EAFE 3 7.1% 18.3 % 12.2 % 18.4 % 9.3 % % % 16.8 % 2.1% 16.3 % 130.3% 1.9 % %.3 % 8.7 % S &P Asse t Asse t S &P Asse t Russe ll S &P S &P S &P Asse t Ca sh Alloc. Alloc Alloc Alloc % 12.5 % 8.3 % 15.8 % 7.4 % % % 15.1% 0.1% 16.0 % 117.7% % Asse t S&P Ma rke t Asse t Ba rc la ys DJ UBS Asse t Asse t Asse t Asse t BaS rc&p la ys S &P Alloc Ne utra l Alloc. Agg Cmdty Alloc. Alloc. Alloc. Alloc. Agg % 10.9 % 6.1% 15.2 % 7.0 % % % 12.5 % % 11.2 % 98.6% 0.2 % %.6 % 7.1% DJ UBS DJ UBS S &P Ma rke t S &P S &P DJ UBS MS CI Russe ll Ba rc la ys Ba rc la ys Ba rc la ys Ca sh Cmdty Cmdty Ne utra l Cmdty EAFE Agg Agg Agg % 9.1% 4.9 % 11.2 % 5.5 % % 18.9 % 8.2 % % 4.2 % 65.8% 0.0 % %.8 % 5.2 % Ma rke t Ma rke t Russe ll Ba rc la ys Ba rc la ys MS CI Ma rke t Ma rke t Ca sh Ca sh REITs Ca sh Ne utra l Ne utra l Agg Agg EAFE Ne utra l Ne utra l 7.1% 6.5 % 4.6 % 4. 8 % 4. 8 % % 5.9 % 6.5 % % 0.1% 060.2%.0 % %.2 % 4.8 % Ba rc la ys Ba rc la ys Ba rc la ys Russe ll MS CI Ma rke t DJ UBS Ma rke t DJ S &P UBS DJ UBS Ca sh Ca sh Agg Agg Agg EAFE Ne utra l Cmdty Ne utra l Cmdty Cmdty 4.1% 4.3 % 3.0 % 4.3 % % % 4.1% 0.1% % 0.0 % -49.3% %.3 % 4.1% Ca sh Ca sh Ba rc la ys Agg DJ UBS Cmdty REITs MS CI EME Ca sh Ma rke t Ne utra l MS CI EME DJ UBS Cmdty DJ UBS Ca sh Cmdty Asse t Alloc. 8.1% 1.0 % 1.2 % 2.4 % 2.1% % % 0. 1% % % - 1.1% -18.2% %.2 % 1.7 % Ca sh Maintain a diversified approach: The best and worst performing asset classes vary greatly year to year. Source: Russell, MSCI, Dow Jones, Standard & Poor s, Credit Suisse, Barclays Capital, NAREIT, FactSet, J.P. Morgan Asset Management. The Asset Allocation portfolio assumes the following weights: 25% in the S&P 500, 10% in the Russell 2000, 15% in the MSCI EAFE, 5% in the MSCI EMI, 25% in the Barclays Capital Aggregate, 5% in the Barclays 1-3m Treasury, 5% in the CS/Tremont Equity Market Neutral Index, 5% in the DJ UBS Commodity Index and 5% in the NAREIT Equity REIT Index. Balanced portfolio assumes annual rebalancing. All data represents total return for stated period. Past performance is not indicative of future returns. Data are as of 12/31/12, except for the CS/Tremont Equity Market Neutral Index, which reflects data through 11/30/ yrs returns represent period of 1/1/03 12/31/12 showing both cumulative (Cum.) and annualized (Ann.) over the period. Please see disclosure page at end for index definitions. *Market Neutral returns include estimates found in disclosures. 34

35 Traditional IRAs vs. Roth IRAs 2012 Appendix Maximum contribution Age limits to contribute Income limits to contribute Federal tax treatment Mandatory withdrawals Deadline to contribute Traditional IRA Roth IRA Roth IRA conversion 100% of earned income up to $5,000 $6,000 if eligible for a catch-up contribution 1 Reduced by Roth IRA contributions 100% of earned income up to $5,000 $6,000 if eligible for a catch-up contribution 1 Reduced by Traditional IRA contributions Under 70½ in the year of the contribution None None Single: Up to $58,000 for full deduction, $68,000 for partial 2 Joint: Up to $92,000 for full deduction, $112,000 for partial 2 Investment growth is tax deferred and contributions may be tax deductible. Deductible contributions and investment gains are taxed as ordinary income upon withdrawal. If non-deductible contributions have been made, each withdrawal is taxed proportionately on a pro-rata basis, taking into consideration all contributions made to all Traditional IRAs owned. Early withdrawals before 59½ are generally subject to a 10% IRS penalty unless certain exceptions apply. Distributions must begin by April 1 of the calendar year following the year the account owner turns 70½. Single: Up to $110,000 for full contribution, $125,000 for partial Joint: Up to $173,000 for full contribution, $183,000 for partial All contributions are non-deductible. Qualified withdrawals of contributions at any time are tax free and IRS penalty free. Qualified withdrawals of earnings are tax free and IRS penalty free if taken after five years have passed since the account was initially funded and the account owner is age 59½ or older (other certain exceptions may apply). Early withdrawals of investment gains are subject to taxes and 10% federal penalty unless certain exceptions apply. Multiple Roth IRAs are considered one Roth IRA for withdrawal purposes and distributions MUST be withdrawn in a specific order deemed by the IRS that applies regardless of which Roth IRA is used to take that distribution. None for account owner April 15, 2013 April 15, 2013 n/a No limit on conversions of Traditional IRAs, SEP IRAs, SIMPLE IRAs (if open 2+ years) None Taxes are due upon conversion of account balances not yet taxed. Converted amounts can be withdrawn tax free. 3 Qualified withdrawals of earnings are tax free and IRS penalty free if taken after five years have passed since the account was initially funded and the account owner is age 59½ or older (other certain exceptions may apply). Early withdrawals of investment gains are subject to taxes and 10% federal penalty unless certain exceptions apply. None for account owner Source: IRS Publication Must be age 50 or older by December 31 of the contribution year. 2 Assumes participation in an employer s retirement plan. No income limits apply when investors and spouses are not covered by a retirement plan at work. 3 Distributions from a conversion amount must satisfy a five-year investment period to avoid the 10% penalty. This pertains only to the conversion amount that was treated as income for tax purposes. 35

36 Traditional IRAs vs. Roth IRAs 2013 Appendix Maximum contribution Age limits to contribute Income limits to contribute Federal tax treatment Mandatory withdrawals Deadline to contribute Traditional IRA Roth IRA Roth IRA conversion 100% of earned income up to $5,500 $6,500 if eligible for a catch-up contribution 1 Reduced by Roth IRA contributions 100% of earned income up to $5,500 $6,500 if eligible for a catch-up contribution 1 Reduced by Traditional IRA contributions Under 70½ in the year of the contribution None None Single: Up to $59,000 for full deduction, $69,000 for partial 2 Joint: Up to $95,000 for full deduction, $115,000 for partial 2 Investment growth is tax deferred and contributions may be tax deductible. Deductible contributions and investment gains are taxed as ordinary income upon withdrawal. If non-deductible contributions have been made, each withdrawal is taxed proportionately on a pro-rata basis, taking into consideration all contributions made to all Traditional IRAs owned. Early withdrawals before 59½ are generally subject to a 10% IRS penalty unless certain exceptions apply. Distributions must begin by April 1 of the calendar year following the year the account owner turns 70½. Single: Up to $112,000 for full contribution, $127,000 for partial Joint: Up to $178,000 for full contribution, $188,000 for partial All contributions are non-deductible. Qualified withdrawals of contributions at any time are tax free and IRS penalty free. Qualified withdrawals of earnings are tax free and IRS penalty free if taken after five years have passed since the account was initially funded and the account owner is age 59½ or older (other certain exceptions may apply). Early withdrawals of investment gains are subject to taxes and 10% federal penalty unless certain exceptions apply. Multiple Roth IRAs are considered one Roth IRA for withdrawal purposes and distributions MUST be withdrawn in a specific order deemed by the IRS that applies regardless of which Roth IRA is used to take that distribution. None for account owner April 15, 2014 April 15, 2014 n/a No limit on conversions of Traditional IRAs, SEP IRAs, SIMPLE IRAs (if open 2+ years) None Taxes are due upon conversion of account balances not yet taxed. Converted amounts can be withdrawn tax free. 3 Qualified withdrawals of earnings are tax free and IRS penalty free if taken after five years have passed since the account was initially funded and the account owner is age 59½ or older (other certain exceptions may apply). Early withdrawals of investment gains are subject to taxes and 10% federal penalty unless certain exceptions apply. None for account owner Source: IRS Publication Must be age 50 or older by December 31 of the contribution year. 2 Assumes participation in an employer s retirement plan. No income limits apply when investors and spouses are not covered by a retirement plan at work. 3 Distributions from a conversion amount must satisfy a five-year investment period to avoid the 10% penalty. This pertains only to the conversion amount that was treated as income for tax purposes. 36

37 Medicare definitions and information Medicare is a government health care program available to those who have paid Medicare taxes while working or to non-working spouses of such individuals. Medicare is available when these individuals reach age 65. Citizens who have never paid Medicare taxes may be eligible if they pay a Medicare premium. Individuals under age 65 may also be eligible if they are considered disabled under Social Security or the Railroad Retirement Board for more than 24 months. Appendix Part A B Explanation This is hospital insurance. It pays for hospital, home health, skilled nursing facility costs (on an extremely limited basis) and hospice care for the aged or disabled. This is medical insurance. It helps pay for physician, outpatient care and home health (in the rare instance when a person does not have Part A coverage). It also pays for other medical services for the aged and disabled who have voluntarily enrolled and pay Part B premiums. Enrollment information If receiving Social Security, enrollment is automatic at age 65. If not getting Social Security, sign up in the 3 months either before or after turning age 65. There is a deductible and coinsurance for hospital stays. Automatic enrollment like Part A, but Part B may be rejected by individual. Premiums, an annual deductible and coinsurance apply. There is a late enrollment penalty. C Medicare Advantage plans are private health plans offered as an alternative to Medicare Parts A and B. These plans contract with Medicare to provide coverage that is at least equal to Medicare A and B. People will need to decide whether to enroll in such a plan, and, if so, which one. This choice may involve many comparisons between premi ums, co-pays, network providers, coverage offered in addition to basic Medicare, etc. Making comparisons again at annual re-enrollment time may be helpful, too, since plan features do change. Options vary a great deal by geographic area. Enroll as an alternative to coverage in Part A and Part B. D Medigap Policies Offered by private insurers, these plans provide voluntary insur ance for prescription drugs for all beneficiaries, and premium and cost-sharing subsidies for low-income enrollees. In many areas, insurers offer many competing plans, so choosing a Part D plan will involve comparisons between plan costs, features, providers and other factors. At annual re-en rollment time, new plans and options may be available and the relative costs may have changed, so new plan comparisons may be in order. Offered by private insurance companies, this insurance covers items that may not be covered by Medicare. Examples of items not covered by Medicare are listed below. Enrollment is optional. There is a monthly premium, plus co-pays on certain prescription purchases. There is a late enrollment penalty. Enrollment is optional. Individual may purchase directly from a private insurance company. Medicare does not cover: Long-term care (Medicare does pay for medically necessary skilled nursing facility or home health care on a very limited basis) Custodial care Vision care Dental care Hearing devices Summary of information taken from Society of Actuaries, Taking the Health Insurance Journey,